Could your business cope without you?

Martelli McKegg Senior Associate Emma Foster addresses the importance of succession planning for business owners

Succession and personal asset planning is often one of the last things business owners think about – usually, because they are too busy running their business. Unfortunately, the failure to properly plan for what would happen to your business in the event of your unexpected death can simply shift the burden to your business partners and your loved ones, leaving them to pick up the pieces.

It is important to pause and consider what would happen to your business in the event that tomorrow, you’re no longer around to run it. This article summarises some of the primary matters that you, as a small business owner, should consider when it comes to your will.

Importance of ownership status

The first thing to consider is how your business is owned. Are you a sole trader?

Is your business run through a company? If it operates as a company, who are the directors and shareholders?

Operating as a sole trader

If you are a sole trader, upon your death there is no distinction between your personal assets (like your home) and your business assets (for example, vehicles and tools). You can deal with your business assets in your

will, just as you would deal with any other assets that you own.

After your death, your assets would first be applied to payment of any debts (with no distinction between debts that are personal, like your mortgage, or debts that are business-related, like those owed to sub-contractors).

It is possible to specify that your business assets be left to a specific person, and you could record that their receipt of those assets is subject to them taking on responsibility for the liabilities relating to the business.

You will need to carefully consider who you appoint as the executor or executors of your will, as they will need to deal with winding down the business after your death.

This could include dealing with matters like unsettled invoices, creditors, employee wages, existing contracts with third parties and tax. Will your spouse or children be able to deal with these matters if they are already struggling to cope with your death? Do they have any familiarity with the operation of your business, or the operation of any business? If you think that the job may be too difficult for your family, you may wish to consider appointing a professional, such as your lawyer or accountant, to act as executor.

Operating through a company

If your business operates through a company, which is the most common form of business ownership in New Zealand, you will need to consider whether the business is likely to continue to operate after your death, or whether it is more likely to be wound down or sold. If your business operates through a company, you do not own the business assets, and so cannot deal with them in your will. Instead, you own the shares in the company, and must consider what should happen to the shares after your death.

It is important to note that you cannot pass on your role as director of your company through your will. Rather, the owner of the shares (which immediately after your death, is going to be the executor/s of your will) will need to select a replacement director to run the company in your stead.

If the company is not intended to continue trading after your death (which is the case for many small businesses that are entirely reliant on the activities of the director to turn a profit), the director appointed by your executor/s may need to arrange for the business to be sold. Some will-makers choose to put a separate memorandum in place in respect of their business, setting out their wishes as to how the executor/s of their will should deal with the business after their death. They may express their wish that a specific family member or close friend be appointed as a director and detail what they wish to happen to the business.

Transferring ownership

Often, a business owner may wish for a specific child take over the running of the business to the exclusion of their other children, particularly if that child has been involved in the business during the will-maker’s lifetime while the others have not. This is extremely common in farming situations and is also typical of many small businesses.

In this case, the will-maker will need to consider whether they have sufficient other assets to provide for their other children, to ensure that any children who are not being left the business do not feel as if they have been treated unfairly and seek to challenge the will under the Family Protection Act 1955. This Act enables children to challenge the wills of their parents if they consider that they have not been adequately provided for. Will-makers who are treating their children unequally in their wills should take advice on how this Act may apply to them.

In some cases, depending on what you are trying to achieve, establishing a trust to own the shares in the company may be appropriate to ensure continuity of ownership after your death.

Dealing with co-shareholders

If the company has other shareholders, you may need to consider the terms of the shareholder’s agreement, as these can define what you can and cannot do with your shares. Other shareholders may have pre-emptive rights to purchase your shares in the event of your death. Often, surviving shareholders have no interest in having the deceased shareholder’s family involved in the business, and equally, the deceased’s family may have no interest in being involved in the company and would rather see the shares sold.

If you have agreed with your co-shareholders that in the event of one of you dying, the others will buy out the deceased’s shares, you may also need to consider whether the company takes out life insurance or key person insurance over the other shareholders, to ensure that adequate funds are available if the surviving shareholders do need to buy the deceased’s estate out of the company under the shareholders agreement.

Impact on personal asset planning

You may also need to consider whether you have personally guaranteed your company’s debts to banks or other third parties. If you have, and your death means that the company is unable to pay its debts, your personal assets such as your home may be at risk. Again, you may wish to consider life insurance to provide financial security for those you are leaving behind.

In summary, owning a business does add another layer of complexity to personal asset planning. However, taking the time to consider the future and plan for the unexpected, while daunting at first, can save your loved ones a lot of grief.

Emma Foster is a senior associate at Martelli McKegg Lawyers who has extensive experience assisting small and medium business owners with their personal asset planning needs.

Her phone number is (09) 379 7626 and e-mail is emma.foster@martellimckegg.co.nz. This article is not intended to be relied upon as legal advice.