What Happens to a Company When a Director Dies?
Many business owners spend years building a company but give very little thought to what happens if they suddenly die.
If you are a sole director, shareholder or co-owner of a private company, your will is only one part of the succession planning picture. Your company is a separate legal entity, which means its assets do not automatically form part of your personal estate.
That makes business succession planning an important part of any comprehensive estate plan.
What Happens If a Sole Director Dies?
If you are the sole director of a company, arrangements will need to be made so someone can take control of the company after your death.
The first document to review is usually the company constitution.
A company constitution sets out the internal rules governing the company and may include provisions dealing with the death of a sole director. Depending on how it is drafted, it may allow your legal personal representative to become involved in appointing a replacement director or provide another mechanism for succession.
Where the constitution does not deal adequately with the situation, the Corporations Act 2001 (Cth) contains provisions that may allow a legal personal representative to arrange for a new director to be appointed.
This is why understanding your company structure before preparing your estate plan is so important.
Can Your Executor Become the Company Director?
Potentially, yes.
In many situations, your executor or legal personal representative may play an important role in managing the company after your death.
However, that does not automatically mean your executor is the right person to run your business.
When preparing your estate plan, consider whether your executor:
understands the company;
has appropriate business experience;
is comfortable taking responsibility; and
knows what you ultimately want to happen to the business.
A detailed letter of wishes can also provide valuable guidance about whether the company should continue, be sold or eventually wound up.
What Happens to Your Company Shares When You Die?
While company-owned assets belong to the company, shares that you personally own can form part of your estate.
If you are the sole shareholder, your will may determine who ultimately receives those shares.
Things become more complicated when there are multiple shareholders.
For example, you may want your business partner to have the opportunity to acquire your shares rather than leaving your family holding an interest in a company they do not understand or want to manage.
This is where a well-prepared shareholders agreement becomes extremely valuable.
Why Do You Need a Shareholders Agreement?
A shareholders agreement can establish what happens if one shareholder dies.
It may deal with questions such as:
Can the surviving shareholder buy the deceased shareholder’s shares?
How will the shares be valued?
How long does the surviving shareholder have to make an offer?
Can the deceased shareholder’s family keep the shares?
How will the purchase be funded?
Without clear arrangements, families and surviving business partners can be left trying to negotiate these issues during an already difficult time.
Frequently Asked Questions
Does my company form part of my estate?
The company itself is a separate legal entity. However, shares you personally own in the company may form part of your estate.
What happens if there is another director?
If another director remains in office, they generally continue as director. Succession planning is particularly important where there is only one director.
Can I leave my company shares to my business partner?
Potentially, but the best structure will depend on your will, company constitution, shareholders agreement and broader succession arrangements.
Should business owners have a separate succession plan?
Yes. A will alone may not adequately deal with company control, share transfers, business continuity or the future ownership of the business.
Final Thoughts
Business succession planning is about more than deciding who inherits your shares.
Directors and shareholders should consider who can control the company, what the constitution says, how shares will be transferred and whether the business should continue after their death.
If you own or control a company and have not considered these issues, contact Lidia Vicca or book a free consultation to review your estate planning and business succession arrangements.