Running a business can be all-consuming. What once started out as a passion project may now be your full time occupation, with obligations to employees as well as customers to keep things afloat.
You would be forgiven for putting off thoughts of succession planning.
The reality is that succession planning for your business should start as soon as possible. Often by the time that someone wants to retire, it has to be delayed because the arrangements are not yet in place.
Retiring later than intended is a pain – but what if the worst happens and you die unexpectedly?
No succession planning
Let’s assume the worst and you die unexpectedly. You are young, fit and healthy and so you never put a Will in place.
Firstly, the distribution of your estate passes under intestacy rules. This prioritises your closest blood relatives and any spouse that you might have. If you are unmarried, separated but not divorced, or estranged from your children, the law doesn’t take this into account.
Specifically in terms of your business, the next steps depend on any partnership or shareholders’ agreement, as well as the articles of association (for limited companies). These documents set out what happens both in terms of day-to-day running of the business, and the transfer of shares (again, for limited companies). Generally, a partnership will dissolve on the death of one of the partners, leaving no business behind. The director of a limited company cannot pass their directorship on when they die, which could mean that there are no directors left in the company to make day-to-day decisions. Articles of association vary so widely that independent advice should be taken regarding a particular company’s rules and their effect.
If the company shares can be transferred on death then is the beneficiary suitable? For example, is your spouse involved in the day-to-day running of the business? Do they have the necessary business acumen or technical expertise required to service customers? Often, there may be a business partner who is not related or not directly related to the deceased, but who would have been a much better choice to continue running the business.
It is also unlikely that the intestacy rules will provide the most tax efficient way of passing on your business interests. Tax reliefs can be maximised, and therefore tax payments are minimised, by careful planning with experts like those here at Lawson West.
What succession planning can be done?
The most important thing is to prepare a Will, which can avoid most of the above pitfalls. By stating who should take over the running of your business, or who should receive any shareholding, the consistency and stability of your business is maintained. You can even appoint a business Executor if you like.
Here at Lawson West, we can also provide advice on inheritance tax planning and assist you in drafting your Will in a tax efficient way. This benefits both your business partners and your loved ones.
You may also want to consider putting a partnership or shareholders’ agreement in place to cover what should happen in the event that someone passes away. For more information, you can contact our Corporate and Commercial team.
Importantly, you should also discuss succession planning with those who are closest to you, both in the business and personally. Ensure that processes are in place so that if the worst does happen unexpectedly, your colleagues can ensure that the business continues to function and your loved ones know what will happen.
To discuss preparing a Will which deals with your business interests and assets, please contact our Probate, Wills and Trusts team by completing our website enquiry form here.
