Business Law & Compliance
Is your business prepared for death? Why a will should be your New Year’s resolution
4 min read
20 January 2017
Many businesses aren't prepared for death, caught out when the unforeseen departure of a director or shareholder becomes reality. The resulting problems not only impact the company but also the deceased’s loved ones and their employees, both of whom can be left with unwanted issues to contend with.
Courts are increasingly occupied with companies that weren’t prepared for death – the deceased may leave more than simple household assets and bank accounts. They could also hold company shares and loans or be a sole-shareholder or director of a firm. Without a will in place these issues just become messy to resolve, threatening the future of the organisation.
Problems can arise over shares held by the deceased. In the absence of a will, such shareholdings are divided under the Intestacy Rules – imagine the dissatisfaction where a beneficiary starts demanding dividends but makes no contribution to the company. A new shareholder may feel aggrieved that existing shareholders cannot either afford to or aren’t prepared to purchase their shares, causing a rift to occur on the board. Or the new person may have a minority shareholding, which would significantly reduce their open market value as often the only prospective buyers are the other shareholders. Therefore, the value can be diminished.
A will ensures that shares pass to appropriate beneficiaries and executors are appointed to manage the shareholding, so the company continues to operate effectively. The worst situation is if there are several beneficiaries with competing interests. If this is the case and there are many shareholders involved with the business, then there is scope in the will to enter into a “cross option agreement” where the shareholders agree to buy the shares of the deceased at a calculated price. Shareholders can also take out life insurance to guarantee funds for the purchase, which would need to tie in with the Will provisions of the deceased.
If the deceased provided funding to the company then, as a creditor, this ‘asset’ would form part of their estate and would need to be repaid. If the company wasn’t prepared for death, the loan terms weren’t properly documented in a will and a dispute arose, then this could cause financial problems for the company.
The ‘One-Man Band’
Businesses with a sole shareholder and no surviving directors to deal with creditors, are often struck off at Companies House. This is not only disastrous for employees but can lead to claims against the company. Often it results in potentially unpleasant investigations into the deceased’s execution of director’s duties owed to company creditors prior to their death, which are then claimed back upon their estate.
To avoid this, ultimately, be prepared for death. Ensure the will appoints suitable executors and trustees to restore order and to continue to operate the company after death.
Running a company is always a busy juggling act, with lots of different priorities and demands but it would be disastrous to spend all your time building a successful business only for disaster to strike and the value of your business to suffer or worse still, to be closed. Take time to plan ahead in the event of death, and to ensure that the value of your business passes to your beneficiaries appropriately and in a way, that will allow the company to continue to grow and prosper, even after you are gone.
Robert Jobson is partner in the Inheritance protection team at Gardner Leader solicitors