Death may be an inevitable fact of life, but it’s not a fact that many of us are comfortable talking about.
We’re also not very good at preparing for death; a study published last weekend by Co-op revealed that 60% of UK adults have not made a will, leaving their estate at risk.
Of those that have made a will, 55% have never updated it, potentially making it invalid if there have been any life changes, such as a marriage or divorce.
Small business owners need to be particularly aware of the importance of preparing for death because of the potential impact on their business.
Many small business owners do not have a succession plan in place, which could lead to material tax inefficiencies, financial loss and even potential collapse of the business should they die.
The legal position
According to a survey by Barclays last year, only 49% of UK small businesses have a succession plan in place.
In some respects this is understandable; owners have to focus on the day-to-day demands of running a small business and may not have the capacity to plan for the longer term.
But in failing to do so they are putting everything they have worked for at risk.
If you are the sole director of your business and you die, your company must appoint a new director as without a director the company would be in breach of the Companies Act 2006 and would be left without a way in which to make decisions.
A delay in this process could lead to a period of uncertainty and a loss of business. Banks and other financial bodies may not accept instructions if they are not satisfied there is someone authorised to act for the deceased.
Even without a director in place your company must continue to pay corporation tax and file tax returns.
If a new director is not appointed Companies House will eventually strike the company off, as it is technically breaching the Companies Act 2006 which states that there must be at least one director.
Surviving shareholders can hold a shareholders’ meeting to appoint a new director, but what if the deceased was also the sole shareholder?
If your company was incorporated before the 2006 Companies Act it is up to the personal representative of the dead shareholder to seek a court order to appoint a new director. This can be a long, expensive process.
However, if your company was incorporated after the act, the personal representative can appoint a new director.
If a personal representative has not been chosen, the executor of the estate can appoint a new director, as long as the company’s articles allow it.
What you need to do
The old adage ‘by failing to prepare you are preparing to fail’ has never been truer; if you do not have a succession plan in place should the worst happen, your small business and all your hard work could die with you.
At the very least you should make a will and appoint an executor who you can trust to make the right decisions for your business. You should make it clear in your will who will be the beneficiaries of your shares.
If you have the funds it is worth considering taking out a Key Person Protection policy, also known as Key Man Insurance. This would insure the business against financial loss should your ‘key person’ (i.e. you) die, or become seriously ill.
Ideally you should ensure your company articles, whether drawn up pre or post the 2006 act, include the right for a personal representative to appoint a new director in the event of your death to minimise any cost or delay.
Your executor and/or personal representative should be made aware of their roles and responsibilities and given detailed instructions to ensure any business disruption is kept to a minimum and they have an idea of your wishes for the management of the business in the event of your death.
All documents related to this should be kept safe and all parties and representatives should know how to access them.
By planning for the worst well in advance you can make sure the future of your business is safe, in the hands of someone you trust with the knowledge and ability to keep it going after you have gone.
By Sheraz Akram, Head of Corporate and Commercial Team, DJM solicitors