Question

I recently heard someone talking about a will for a business. How does this work?

Answer

A will for a business documents what should happen to your interest in a business should you pass away.  This is something that anyone who owns or co-owns a business should do.  I have come across situations where a business owner passes away and chaos reigns while arrangements are put in place to keep the company running.

Remember, only individuals can draw up a will that is enforceable by law, a will for a business needs other structures in order to enforce it.

If you own or co-own a business, you should create a will for your business which documents what you would like to see happen to your interest in the business should you pass away. 

There are a couple of options:

Your spouse takes over your shares

As your spouse would typically inherit your share in the business, is it your intention that he or she become actively involved in the running of the company?

If this is the case, then you should ensure that your spouse has the knowledge and capacity to do this.  If there is a knowledge gap, then you should spend some time familiarizing your spouse with what is needed to do the job effectively

You would also need to check with your fellow directors are happy with your spouse getting actively involved. Remember, you and your colleagues have walked a path in building up the business.  Introducing your spouse to the business can cause stress and tension.

If your spouse just takes over your shareholding and is not actually involved in the business, what structures should you be putting in place now to ensure that he or she is able to draw a fair income from the business.

Your shares are sold to an external person

Your spouse or estate could sell your shares to an external person or entity. 

If this is the intention, then you would also need to give some consideration to your fellow directors and decide how much input they should have in the choice of buyer.

Your fellow directors buy your shares

Your fellow directors would take over your interest in the business and compensate your family for this. 

If this is your intention, then you and your fellow directors should set some ground rules to ensure that everyone is treated fairly. 

• You would need to have the business valued so that you are able to place a Rand value to each director’s shareholding. This would need to be revised upwards or downwards each year when the company’s books are done.
• You would need to agree on the mechanism for buying the shares of the deceased director. There would need to be some sort of contract where each director agrees to buy out each other director in the event of a death.
• You would need to ensure that each director has the funds to be able to buy the shares. If these funds are not available, then you would need to take out life insurance on each other’s lives in order to fund this.

In addition to your shareholding, there could be director’s loans that may need to be settled. You would need to give some thought as to how this would be funded.

If you are a key part of the business, you could have a situation where the business itself has to close should you pass away. Again, you would need to give some thought as to what would happen to existing staff and make provision for the costs involved in closing down the business. 

Drawing up a will for a business will ensure that you reduce the amount of unnecessary stress and leakage of value that comes with a death.