What happens to your business at your death?

Death is a very emotional event for loved ones left behind. It could also cause disruption with regard to the material side of life, especially when the breadwinner dies. This could also be the case when the key person in a business dies.

In this article common challenges of which business owners should be aware of, are discussed briefly.

Any business can be operated in one of a number of business entities, e.g. a one-man business, partnership, close corporation, private company or an inter vivos (family of business) trust.

Precautionary measures should be taken to ensure reasonable continuity of the business in the event of death, unless closure of the business is desired.

Continuity problems occur mostly in the case of one-man businesses, close corporations and private companies in which the deceased was the only member and shareholder respectively. Powers of attorney in favour of, for example, a spouse or children of full age, lapse at death.

Partnerships are dissolved at death, and the absence of a proper partnership agreement that fully covers eventualities with regard to death could cause disruption. Even a proper agreement could give rise to problems if the surviving partner cannot discharge the obligations, or owing to the risk of insolvency and creditors not being willing to release the estate from debt. If a proper partnership was concluded, the executor has to carry it into effect.

The only likely disruption in the case of a trust is if, as a result of the death, there are no longer a minimum number of trustees and resolutions cannot be passed. In the case of close corporations and private companies in which the deceased was not the only member and shareholder respectively, the death could also cause disruption in that the minimum number of signatures can no longer appear on a cheque or the minimum number of votes cannot be attained at a meeting.

In the case of one-man businesses the bank account is frozen, while funds might be required urgently for salaries and purchases. The executor will have to be appointed as a matter of urgency to take the place of the deceased and temporarily act as member of the close corporation or director of the private company. There obviously need to be sufficient funds, as the executor may not incur debt.

In the will the executor may also be authorised to continue the business (or partnership) until such time as it is handed over to the heir or is sold, but there are restrictions, and a lack of knowledge of the industry could also be a problem.

So make sure that there is minimal, or preferably no, disruption in the event of your death.

Copyright © Sanlam Trust