When taking instructions from a client with a business, it is important to both fully understand how their business is held and what their plans are after they have died. Depending on the structure of the business, there may be certain restrictions on how the business can be left after their death.
A sole trader or sole proprietorship is a business owned and operated by one individual. The sole trader is not considered a separate legal entity and the business is simply an extension of the individual.
When the sole trader dies, this means that the business effectively ceases. In the majority of cases where the sole trader is the only person involved in the business, this may not be an issue to them. Many sole traders are themselves the business and it is unlikely to continue after they have died. The executors would simply finish any contracts that the sole trader had, wind down the business and then distribute any assets according to the terms of the will.
If the sole trader employs any people, their death would have an effect on those employees as their employment would also cease. The employees may then be entitled to redundancy pay from the estate. If a sole trader client wishes for their business to continue after they have died, they should consider incorporating the business.
A partnership is a business run by two or more individuals. It is its own separate legal entity from its partners. Any rights, responsibilities and obligations of the partners is usually detailed in a partnership agreement.
When taking instructions from a client who has an interest in a partnership, the partnership agreement must be consulted. The agreement may make some provision as to what will happen to a deceased partner’s share.
If there is no partnership agreement in place, the death of a partner causes the dissolution of the partnership. The personal representatives would then receive the deceased’s interest in the partnership.
A limited company is a separate legal entity that has all the legal rights of an individual. A limited company will adopt a memorandum and articles of association which will govern the rights and obligations of the shareholders, directors and other officers of the company. There may also be a shareholders agreement in place containing rules and obligations between the shareholders.
When taking instructions from a shareholder in a limited company, the articles of association should be consulted along with any shareholders agreement to ensure that there are no terms contained that would restrict their ability to gift their share.
There may also be cross option agreements in place allowing any surviving shareholders the option to buy a deceased’s share. This should also be considered as it may end up likely that the deceased will only gift the proceeds of sale of their share.