Business Afterlife: Managing Deceased Estates By Business Type
As a business owner, what do you want to leave behind in the event of your death? Will your company be in good hands, and what can you do to ensure that? The administration of deceased estates impacts various business structures and understanding these processes can help you take the necessary steps to secure your company’s future.
Deceased Estates and How They Apply to Companies
Deceased Estates refer to all a person’s belongings that are left after they pass away. These can include anything from their properties, assets, liabilities, and debts. These also apply to businesses or companies, otherwise referred to as juristic entities. Below we will discuss Sole Proprietorships, Private Companies, and Close Corporations and what a few of the important procedures are when a business owner passes away within these.
Sole Proprietorship
If a sole proprietor, or director, passes away, the company will become incapacitated until a new director can take responsibility. This follows section 71(3)(a) of the Companies Act. An important point to be aware of, and one that can cause complications or risks for your business, is if the sole proprietor is also the sole shareholder. This is common for sole proprietor business structures, but it leaves no one to appoint the next director in the event of a death, which can set the business back.
Private Company
Compared to a Sole Proprietorship, which is dependent on the owner, a Private Company is defined as a “separate” entity, and it does not trade publicly. It consists of directors and shareholders; the latter can also serve as a director.
The procedure for appointing a new director will be decided through the Memorandum of Incorporation, Articles of Association, Shareholder’s Agreement, and statutes. Shares can also be transferred to heirs if the estate is solvent.
Close Corporation
In Close Corporations, the members have ownership in the company. When one of these members passes away the process of transferring their interest in the company will be controlled by the corporation’s founding statement, association agreement, and other governing documents.
Several factors will determine where the deceased member’s interest will go, for example, for a solvent estate it will transfer to the heirs, and for an insolvent estate, the interest could be used to pay off any remaining debts. The interest can also be transferred to a spouse if it is indicated in a Last Will and Testament, or a company’s documents.
Buy-and-sell agreements are drafted between more than two owners of a company, and both have life insurance policies set up so that they pay the remaining partner who can then buy the deceased’s shares/interests. To avoid unnecessary estate duties a Buy-and-Sell Agreement needs to be drafted.
How to Prevent Risks When Administering an Estate
The process of administering an estate takes time, from months to years, depending on how intricate the estate is. A delay in the process can negatively impact the business and can cause the inability to enter contracts, access bank accounts, or even pay salaries or taxes. It can also lead to a loss in profits, liquidation, and even the business’s deregistration.
To avoid risks, sole shareholders or directors need to create an official will to indicate who the inheritors will be. It’s also important to appoint an executor, who will oversee the administering and distribution of the estate. Executors can also be given control over shares and assets until these can be transferred to the respective heirs. Other preventions include the appointment of another director.
Ends.
Blog by: Michelle Orsmond
For more information, please contact Hammond Pole attorneys:
Michelle Orsmond – michelleo@hammondpole.co.za