The importance of business succession planning

12/08/2015

What happens to a business if its owner or co-owner dies or falls seriously ill? Much will depend on the type of business – sole trader, partnership or limited company – but unless there has been some advance planning, the chances are that there will be disruption, arguments and the strong possibility that all or part of the business will end up in the wrong hands.

So if you’re a business owner, business succession planning and insurance is important. It’s quite simply the process of planning for what you want to happen if you (or your co-owner, if you have one) were to die or fall seriously ill.

The legal position on the death of a business owner will depend on the type of business entity.

When a sole trader dies, their business dies with them, legally speaking. The business’s assets will form part of the sole owner’s estate and pass on to beneficiaries under the terms of their will. If the owner has not made a will, the intestacy rules apply; in effect, the state lays down who the estate should pass to, and normal inheritance tax (IHT) rules apply.

However, the good news is that most trading businesses are not subject to IHT – if you’re unsure about yours, you should certainly take advice. If your business does not enjoy tax relief, the basic requirement is to create a capital sum, preferably outside the estate, in order to minimise IHT.

This could be achieved with the help of a suitable life insurance policy.

A partnership is a business owned by at least two people. Unless there’s some specific provision in the partnership agreement (and very many partnerships have no formal agreement), a partnership ceases when a partner dies. When that happens, the deceased partner’s estate becomes entitled to their share of the business.

This can mean a choice for the surviving partner or partners. They could pay the deceased partner’s estate a sum of money they all agree to be the value of the deceased partner’s share, or carry on in business together with the deceased partner’s spouse or other beneficiary – even if the new partner has little to contribute to the success of the business.

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