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If you are in Business and you haven't yet made your will think about it!

Will your business survive your death?

by: Martin Goldstraw

Running any business involves constant analysis and planning to achieve your aims of financial stability and independence.  

When it comes to writing your Will a different analysis is required. What would happen to my business if I were to die tomorrow? Who would take the ongoing day to day decisions? Would the business have to be sold? Can I bequeath my business or interest to anyone of my choice and if so to whom?

The answers will depend on the individual circumstances but restrictions on what you can do may also apply in the following situations dependant upon whether the business is operated as a Sole Trader, or in Partnership, or with a shareholding in a Limited Liability company. 

Business Operated as a Sole Trader.

It is common for a sole trader to be the key person of the business with particular skills and experience which may not be easily replaced. In this situation consider whether the business has value (both physical assets and goodwill), enabling the business to be sold as a going concern. If not the only option may be for the business to be wound up and any monies realised added to your estate.  

Sometimes an employee will have been groomed to continue the business and one option would be to bequeath in your Will an option for the employee to purchase the business on such terms as you direct which may include a period of time to raise capital during which a percentage of profit would be paid to your spouse or residual estate.  

Creative thinking can often generate the ways and means of maximising the returns from your business and your Will can be drafted to accommodate almost any method of your choice including the special powers that your Trustees may require to achieve your objectives.  

If you have entered into lease agreements or other binding legal contracts within the business, then these documents should be consulted to see what provision has been made for the event of your death and whether any penalties or rights of assignment etc are contained within.  

A Firm Operated in Partnership.

Business partnerships are popular because they are easy to enter into and have the advantage that at least one other person is contributing to the costs. If only life was that simple!  

Whilst a Partnership can be formed by a simple agreement by the participants to do so, a Partnership is subject to the Law of Partnership defined in the Partnership Act (1890), unless the provisions have been amended or changed by a formal written Partnership Agreement.  

Without an agreement the death of a partner dissolves the firm and the firm is wound up with the applicable proportion of capital and income passing to your estate. The surviving partner(s) may wish to continue trading either on their own account or as a new partnership but will have to raise the necessary monies to pay into your estate within a reasonably short period of time which often forces the sale of the firms assets.

You have no rights to bequeath your position as a Partner but you can bequeath the financial interest you have in the Partnership. Of course as a Partner you are jointly and severally liable for the firmís debts, so if death occurs at a time when your costs and liabilities exceed the capital the firm can raise, then there may not be any financial interest to leave. Any outstanding debt would be payable from your estate as the liability is against the individual Partners and not the Firm.  

Partners can take out appropriate insurance cover to provide for the payment of financial interest on the death of a Partner but even more preferable is to have a formal Partnership Agreement in addition to appropriate insurances.  

The agreement will cover many aspects concerned with the effective operation of the Firm and provide protection for each Partner. In so far as the death of a Partner is concerned, the agreement can determine the options and conditions such as whether you can bequeath your Partnership, how and when any financial interest should be paid to your estate, whether the firm can continue trading with existing assets and how the accounts will be treated by the Inland Revenue.  

In this way the combination of a Will and Partnership Agreement will ensure that your beneficiaries and surviving Partners enjoy an orderly and planned settlement of your business affairs. Equally, if you are a surviving Partner, you will enjoy the protection of your business interests in the same way.  

The Partnership Agreement takes priority over any conflicting clause in a Will and Executors and Trustees cannot take an active part in the running of the Firm other than that required to secure the financial interest of the deceased.  

A Major Shareholder in a Limited Liability Company.

Unlike the Sole Proprietor or Partnership, a Limited Liability Company has its own legal identity quite distinct from the shareholders who own it. The rights of the shareholders are determined by the Company Articles of Association and can be amended as and when required by the shareholders subject to certain formalities being observed.  

The Articles will determine what rights the shareholder has in the disposal of his shares and there is often a requirement to give the other shareholders an option to purchase upon the death of a shareholder. Alternatively there may be the option to bequeath shares to certain family members usually restricted to a spouse and children.  

Clearly, before drafting a Will, the Articles need to consulted and if appropriate, for changes or amendments to be made. The Articles take precedent over any conflicting clause in a Will and the Executors and Trustees cannot interfere in any way with the operation of the Company. 

Related Articles

Grant of Probate, Probate Registries

Executors Duties and your Will

Rules of Intestacy

About The Author

Martin Goldstraw is the principal of a legal services company and specialises in Wills and Estate Planning. You are advised to seek proper legal advice before writing a Will. All laws cited in this article are based upon English Law. martin@goldstraw.org.uk

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Last Update: 14-Mar-2009

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