Business Ownership Issues - part 1

WHAT will happen to my business and whose responsibility will it become if I die?

If you are part of a business partnership, how will your partners continue on without you and will they be able to liquidate your shares to pass on inheritance?

An estimated two thirds of family businesses do not survive beyond the first generation of owners. A proportion of these failures is directly attributed to inadequate succession planning. It is not only death but also on disability or retirement that can destroy a business and plans for its successful continuation.

Many people have started a business partnership (or limited liability company) with at least one 
other person.

The lack of direction after a death can cause fear within staff and customers, and competitors can soon seize that opportunity to move in. A considerable percentage of value can be wiped out in months. The key is to have the correct instructions and protection in place to avoid a 
financial catastrophe.

As a business owner, you’ll surely want to ensure that your business continues to succeed after you retire, whether wanting your children succeed you or sell your business to others. Ensuring the right arrangements are put in place during your lifetime will help. Much depends on the type of business you have and how it is set up in the first place.

With ownership goes control over compensation, benefits, hiring and firing, management, short and long term business goals. Ownership also allows for the creation and maintenance of a Board of Directors, necessary to the long term health of the organisation. Many succession plans involve dividing ownership and control so that the business owner retains control but passes ownership to others.

The most basic and essential requirement, especially for those in business, is to make a will.

If a person dies ‘intestate’ (without having made a will), the law specifies how their assets are to be dealt with. Where shares or other business assets are held, it can also affect business partners, directors, other shareholders and the business itself.

A well drafted will can limit the potential for claims against the deceased’s estate. This includes claims made against the deceased share in a business, which without a will could result in serious damage to the business. Businesses need to ensure their directors have wills and that these concur with any articles or shareholder agreements. Many businesses are family run with the intention that the business should pass to another family member working in the firm. Often a child working with a parent in the family business will have an expectation that the business will come to them. Where this is not covered by a Will, or if the articles of the business allow for another shareholder to buy the deceased’s shares, families can quickly fall out. The child working in the business may be expected to purchase their siblings interest even if the other siblings have never worked in the business or contributed to its success.

Rajiv Shah

Head – Life & Pensions
Earnest Insurance Brokers