Summary
- A sole trader and their business are treated as a single legal entity, meaning the business effectively ceases to exist upon the sole trader’s death, with all business accounts frozen until probate is granted, which can prevent payment of business expenses and wages and trigger redundancy entitlements for employees with at least two years of service.
- If a will is in place, the executor may be able to manage and run the business temporarily, but this is not a reliable long-term solution, and sole traders should consider succession planning including potential restructuring into a limited company or partnership to ensure business continuity.
- Unlike sole trader businesses, partnerships with a partnership agreement in place can continue operating after a partner’s death, as the remaining partner can control the business, though without a partnership agreement the partnership automatically dissolves upon a partner’s death.
- This article is a guide to the impact of a sole trader’s death on their business for self-employed individuals and business owners in England and Wales, explaining what happens to the business, its employees, and its assets, and how to plan for business continuity.
- LegalVision is a commercial law firm that specialises in advising clients on business structures and succession planning.
Tips for Businesses
Consider restructuring your sole trader business into a limited company or partnership to ensure the business can continue operating after your death, as these structures separate the business from its owner as a legal matter. Put a will in place and clearly address what should happen to your business assets and operations upon your death to give your executor the best possible position to manage the transition. If operating as a partnership, ensure a comprehensive partnership agreement is in place that specifically addresses the impact of a partner’s death on the continuation of the business.
When a sole trader passes away, the business does not simply transfer to family members or continue trading as normal – it effectively ceases to exist as a legal matter. Understanding what happens to the business, its employees and its assets is essential for anyone operating as a sole trader. This article discusses the overall structure of a sole trader business and the impact of passing away on your business.
What is a Sole Trader Business?
A sole trader business is one where the business owner is self-employed. They have complete control over the overall running of the business, profit, tax and day-to-day business considerations.
A key aspect of this type of business is that a sole trader does not have an individual identity to their business. You will be treated as one legal entity if you are a sole trader. Therefore, your business assets will be considered part of your personal assets upon death. This contrasts with a limited company, where the owners and company are separate from one another. When it comes to liability, such as business debt, company owners have more protection over their personal assets.
Consequently, upon the death of a sole trader, the business ceases trading and effectively dies with them. This can have devastating consequences, particularly if there are employees within the business. It is often assumed, particularly with family businesses, that other family members can take over the business. However, this is not correct. Upon the death of the sole trader, all business accounts will be frozen until probate is granted. This can have detrimental impacts on money pending being paid out of the accounts, such as:
- business expenses; and
- wages.
If employees have been working with the business for at least two years, they will be entitled to claim redundancy from the deceased estate.
What Happens to Business Debts When a Sole Trader Dies?
Because a sole trader and their business are the same legal entity, any business debts become personal debts upon death. This means creditors can make claims against the deceased estate. The executor must use estate assets to settle outstanding business debts before distributing anything to beneficiaries under the will.
If the estate does not have enough assets to cover all debts, the estate is insolvent. In that case, debts are paid in a specific order of priority under Australian law. Secured creditors are paid first, followed by unsecured creditors. Beneficiaries named in the will may receive nothing if debts exceed the value of the estate.
This is one of the most significant risks of operating as a sole trader. Unlike a company structure, there is no separation between personal and business liability.
To reduce this risk, sole traders should:
- keep personal and business finances clearly separated;
- maintain adequate business insurance; and
- consider restructuring into a company to limit personal liability before debts accumulate.
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How to Ensure the Sole Trader Business Continues?
If there is a will in place, the executor may be able to control and run the business. However, it is much more advisable to put in place arrangements to avoid this. To guarantee your sole trader business can continue following your death, you should consider what is termed ‘succession planning.’ Put simply, this is the process of deciding what will happen when the sole trader passes away. Consider restructuring your business to ensure someone is available to continue operations if you pass away or fall seriously ill.
Contrasting Sole Traders with Partnerships
Partnerships can take two forms – general partnerships and limited liability partnerships. In contrast to sole trader businesses, both of these types of partnerships will usually have a partnership agreement drafted, which details the full terms and conditions of the arrangement. This will normally include the impact of one partner’s death on the partnership. Crucially, the business will be able to continue functioning, as there will be a remaining partner to control this.
Partnerships can therefore be a more secure method of structuring a business regarding events such as serious illness or death. However, it is critical to have a partnership agreement in place to account for this type of situation and stipulate the terms of the division of profit.
If there is no partnership agreement, the business must cease trading, and the partnership will automatically dissolve upon one partner passing away. As such, drafting a partnership agreement is crucial to a business’ continued operations in these circumstances.
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Key Takeaways
Sole trader businesses and their self-employed owners are recognised as one legal entity. Therefore, when the sole trader passes away, the business will cease trading at the same time. This can have a huge impact if there are creditors or employees to be paid. If there is a will, the executor can potentially manage this. Still, it is a difficult situation and depends on the individual business and will. If you are a sole trader, it is important to plan for this situation. Consider whether restructuring your business into a limited company or partnership may be more advantageous. In these types of business structures, the owners and company are separate entities, meaning the business can continue to survive without the owner.
If you need help or advice around restructuring your business, LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced business lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
What is a sole trader business?
A sole trader business is one where the business owner is self-employed and has complete control over the overall running of the business. This person is responsible for any profit, tax or day-to-day business considerations.
What happens to a sole trader business if you pass away?
Upon the death of a sole trader, the business ceases trading and effectively dies with them. If there is a will in place, the executor may be able to control and run the business. However, it is much more advisable to put in place arrangements to avoid this.
How does a partnership differ from a sole trader business when an owner dies?
Unlike sole trader businesses, partnerships can continue operating after a partner’s death if a partnership agreement is in place. Without a partnership agreement, however, the partnership automatically dissolves upon a partner’s death, requiring the business to cease trading.
What is succession planning and why is it important for sole traders?
Succession planning involves deciding in advance what will happen to your business upon death or serious illness. Sole traders should consider restructuring into a limited company or partnership, where the business and owner are separate legal entities, allowing the business to survive without them.
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