Posted on November 17, 2022
A lot of business owners spend time working in the business and not on the business. As a result, some important points are not given enough consideration, such as who will run your business if you become incapacitated or pass away?
Most people are not aware that companies are considered separate legal entities and are capable of holding assets. Your personal Will, company constitution and shareholder agreement will affect the distribution of your assets upon your death. Therefore, not only is it important to have a Will as a business owner but also have your company constitution and shareholder agreement checked to ensure that they are drafted correctly.
Sole directors
When a sole director who is also a sole shareholder of a company passes away without leaving a Will, complications can arise such as who is authorised to operate the company.
An authorised representative is a legal personal representative that has been recognised by the Supreme Court of Victoria as someone who is able to administer the deceased’s estate. Therefore, that person would have to apply for Letters of Administration before they are legally able to make business decisions on behalf of the company.
The consequences of not having an authorised person acting for a company include, but are not limited to:
- Banks and financial institutions may be unwilling to accept instructions in relation a company’s trading account;
- Only an authorised person is able to sell the business or wind it up;
- If a decision is made to wind-up the company so all the shareholders can be paid out, the value of the company can become much less if it is not trading during the time that the authorised representative is applying for Letters of Administration.
If a sole director/shareholder makes a valid Will then their shares in the company will be distributed in accordance with their Will. When drafting Wills, clients who are business owners should consider the succession of their shares.
Business co-owners
Businesses should be governed by a buy/sell or shareholder agreement if you co-own your business with others. This will control what happens to your business interest when you die or become incapacitated.
A buy/sell agreement provides business owners with the opportunity to buy the other shareholder’s interests if they become unfit to continue in the business or pass away.
Therefore, if there are partnership agreements, buy/sell agreements, or similar agreements in place for a business then your interest in the business will be governed by the terms of said agreement. It is important to contemplate any agreements in place when drafting your Will.
If your business would benefit from the following services:
- preparing a shareholder’s buy/sell agreement;
- reviewing your company constitution;
- reviewing your company’s current buy/sell agreement or partnership agreement; and
- preparing your estate and succession planning documents.
Please contact Scanlan Carroll Lawyers on (03) 9853 0311.
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