Category: Newsletter | Business Financial Planning Business Planning Small business share holders Business Estate Planning
Last year we published an article on redundancy in your business. You can read that article here. Business Continuity Article. That article touched on a few pointers which business owners need to consider in the event of the death of a partner or shareholder.
Something which was not explicitly discussed was what happens to the business if the business owner or shareholder falls away.
This is what we recommend.
The first scenario:
All the shares are owned by one person, and, in case of death, those shares will be inherited by the next of kin or the beneficiaries of the deceased’s will. (This is also relevant to a sole proprietor, but for simplicity’s sake, this article is written in terms of shares of a business. A sole proprietor can be seen, in this case, as a 100% shareholder.)
Second scenario: The shares are owned by any number of individuals, and, in case of death, the shares of the deceased will be inherited by the next of kin or the beneficiaries of the deceased’s will.
Let’s say there is no will in place, then the shares automatically revert to the next of kin. But wait, there’s more! The estate (i.e. what is inherited) also includes everything the business owns – including all the debt. This means that the business debt does not fall away if the shareholder is deceased. It remains in the business and must be settled out of the estate of the deceased, or at least partially, depending on the shareholding.
It is therefore imperative that, in order to protect the shareholder’s loved ones, to have a will in place and also some form of financial payout, to cover any debts or expenses of the business.
Such a financial payout could be an investment, a policy or insurance.
In both scenarios, the shareholders need to decide what they want to happen with their business should they be deceased. Do they want the business to carry on or do they want the business to be terminated?
If the business is to be terminated, then the shareholder(s) need to assess how that is going to be executed. Will the business be liquidated, or will it simply be wound down and deregistered?
If the business must continue, then the shareholder(s) also need to assess how that is going to happen. Will the demised shareholder’s shares revert to the other shareholders of the business or to next of kin? If the shares go to the next of kin, do the remaining shareholders have an option to buy the shares?
Do they want the next of kin to be the new joint shareholder? If the shares can be bought out, the beneficiary of the shareholder’s will, will need to be compensated for the shares.
The value of these shares needs to be determined on a regular basis so that the compensation for the shares can be calculated accurately. We recommend that this be done on an annual basis by a qualified professional who is objective from the business and all shareholders.
Every scenario we discussed in this article, have financial and tax implications, which need to be taken into account prior to anything happening to any of the shareholders.
For example. If the shares are undervalued whilst the shareholders are alive, the insurance or policy might be undervalued for the shares compensation payout and the remaining shareholders may need to pay in the difference out of their own pockets.
Or worse yet. SARS can penalize the business for undervaluing the shares and require back taxes to be paid, plus penalties.
In conclusion we recommend the following. Plan ahead. Business owners need to have an up-to-date will, which clearly specifies what is going to happen to the business when they are deceased. There needs to be financial planning to cover any costs or debts which might be incurred or outstanding. Also plan for the taxation of the estate, as this is something which can come as a big shock.
Lastly. Use professional consultants to assist you in this process. That will ensure that you don’t leave your loved ones with more heartache than they need to bear. Feel free to contact iFama if you need more information. Resources: Business Tech Article Old Mutual Article Money Web Article
