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It’s something no one likes to think about. What would be the legal and financial consequences in the event of their untimely death? But in this post, we ask similarly uncomfortable question: What happens to a small business if the owner dies?
As the owner of a small business, it’s essential that you consider the potential implications of your death. Doing so will help to avoid leaving your loved ones entangled in difficulties. Being proactive and planning for the unexpected is part of your responsibility as a business owner.
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What Steps Should You Take?
First, it goes without saying that, as soon as you have a business, you need to ensure you have a valid will in place. If you die without one, or it’s successfully challenged, your assets will be distributed according to fixed intestacy rules. For a simple explanation of intestacy rules, read AFG Law’s guide. You could also speak with an attorney, who could make clear how much easier it will be if you’ve planned correctly.
Create a Succession Plan
Imagine you died tomorrow. Who would take over your role in keeping the business running? Choose a successor and ensure you provide them with the tools and knowledge to operate your company successfully in the event you suddenly aren’t around. Make a clear succession plan so everyone is aware of what will happen.
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Invest in Life Insurance
Life insurance can significantly ease the financial burden on those you leave behind. If necessary, it can contribute toward the payment of any outstanding debts the business has when the owner dies.
What Happens When Sole Traders Die?
If you’re a sole trader, your business essentially ceases to exist when you die. Your personal and business finances are not separate, so any assets, as well as any debts, become part of your estate. They will be dealt with through your will.
If you have debts, your heirs can sell any of your assets to pay them. Bank loans, mortgages, employee salaries, and any unpaid rent or supplier invoices will be paid from your estate.
What Happens When a Partner in a Partnership Dies?
If you’re in a partnership, it will automatically dissolve when you die. Your partner(s) would then have the option of purchasing your share, or they could sell it to a third party.
Clarity in this situation is essential to ensure business continuity. This is why you should ensure you address what will happen. Then, it can be clearly specified in any partnership contract what would happen to the business in the event of the death of any of the partners.
What If Yours Is a Limited Liability Company?
If you are running your business as a limited liability company, then your personal assets are entirely separate from those of the company, even if you are the sole director. This means it is the company itself that will be liable for any debts in the event of your death. These will not have to be covered by your personal assets.
Your shares in the company can be sold or transferred, with the proceeds added to your estate.
If the company closes due to your demise, any debts, including loans, employee salaries, rent, supplier invoices, and so on, would still be covered by the assets of the company.
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Plan Ahead and Put Everything in Writing for When You Die
The laws related to inheritance and succession are complex. Avoid causing additional problems for your loved ones at a time of grief by thinking clearly about the situation, planning ahead, and getting everything clarified in writing to prevent miscommunication.
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