How can I protect my business in the event of my death?

While it may be a morbid thought, it is important to be prepared for the inevitable. You may have prepared to take care of your family in the event of your death, but what will happen to your small business? If you fail to plan, however, something you spent years building could easily disappear.

What steps and which documents you should have in place will depend on the legal structure of your business. You should also be mindful of three things:

  • Your business succession plan should coordinate closely with your personal estate plan;
  • You must keep both of them up-to-date in order to reflect changes in business, life and law; and
  • This is not a do-it-yourself project. Get some professional help.

Are you doing business as a sole director and shareholder?

The Corporations Act 2001 provides that in the event of the death of a single member and director of a proprietary company, the executor or other personal representative appointed to administer the deceased’s estate may appoint a new director to the company. The director will then have all of the powers, rights, and duties of the deceased director and can keep the company running. Once the company shares are transferred to the deceased’s beneficiaries, they can appoint a new director.

If there is no will, the court may grant Letters of Administration to a family member. That person may then appoint a director, but the risk of delay is substantial and may itself damage an ongoing business. At worst, the company may be deregistered or wound up.

In this situation, the most important document that you must have in place is a valid will that appoints an executor. Supplemental guidance to an executor about the appointment of a director may also be useful.

Are you doing business as a partnership?

Many businesses that begin as sole enterprises eventually become partnerships as the organisation’s need for capital grows. Hopefully, this is done in line with the terms of a formal partnership agreement that spells out what would happen on the death or permanent disability of either partner. There are several possible options:

  • The deceased’s estate may take over his or her share of the partnership. This choice looks simple enough, but it may be fraught with complications when a family member steps in to run the business.
  • Alternatively, the remaining partner or partners may purchase the deceased partner’s share from the estate, using a specified formula.

There are many possible variations on both these options. In some cases, the purchase of the partner’s share may be financed with life insurance.

Another alternative is to have a separate buy/sell agreement, under which partners and their spouses agree to negotiate terms and conditions of transfer in the event of death or disability. This can also be useful if a partner is neither dead nor disabled, but has simply decided to move on to other adventures.

In the absence of a partnership agreement or buy/sell agreement, the partnership will end according to the Partnership Act, as it applies in your state or territory, and the task at hand may be a simple matter of liquidating remaining physical assets. Usually liquidated assets are worth far less than the business as a going concern.

It is important to have a plan to protect your business in the event of your death. Even if you currently have a will, the best advice you can receive is to always ensure it is up to date.

Dr Linsday Stoddart, Estate and Succession Planning, Owen Hodge Lawyers