It’s something people don’t really enjoy talking about, but the sudden death of a company director has the potential to impact many people outside of their family. Here’s a look at why you need a succession plan and what happens if you or your company director passes away with no protective measures in place.
Why have a business succession plan?
You’re young, you’re healthy, and your company is still growing, why worry about who would take over if you weren’t around? It may seem like a problem for the distant future, but life can bring unfortunate surprises. As much as you don’t want to think about potential accidents or illnesses, the possibility of sudden and unexpected death is always there for everyone. By ensuring you have a smart succession plan, you will protect your business, your team and your family from a range of potential problems if the worst should occur. Your plan doesn’t have to be complex but you should confirm in writing what should happen to the business and its assets if you pass away. If you have a good accounting and legal team, they will be able to help whoever steps in to execute your wishes.
What happens to a company when the sole director dies with no succession plan?
For companies with multiple directors, power can transfer to a surviving director while the shareholders elect someone new. For companies with sole directors, things are not so simple. The problem if a sole director of a company dies without succession plans is that the company can find itself bereft of leadership. This creates a legal issue. According to the Australian Securities & Investments Commission’s (ASIC) Information Sheet 73, during a period with no director, the company may not be able to operate legally. At this point, it is expected that a near relative or other person will apply to the local supreme court for letters of administration. These letters are needed for the management of the estate. If there is no eligible party to take on this responsibility, the Public Trustee may step in to administer the estate.
In either case, the whole process can take months.
During this time, the business will not be able to operate legally. For many small businesses, this can be a death knell, especially in the current economy. It may even be difficult to quickly sell the company as there is no recognised owner to transfer funds to. The worst case scenario if a sole director dies without a succession plan is that employees do not get paid and the Director’s family is left with an unsellable business.
How to ensure your succession
To ensure that your company and your family are protected, you, as a sole director, need to make a will. In your will:
- Name beneficiaries of your shares in the company
- Name a successor or grant power to an executor to name a successor in the event of your death or incapacitation
To ensure your will is binding, the Australian Securities and Investments Commission says:
“a will must be signed at the end by the testator, or by someone authorised by him or her, and the signature must be acknowledged by the testator in the presence of at least two witnesses who are not also beneficiaries under the will, who must themselves sign the will in the testator’s presence.”
Where to begin
As well as helping you grow your business, manage your compliance and do your taxes, your accountant can help you create your succession plan. In conjunction with your lawyer, you can talk through the operating model and finances involved with your business, and make a handover plan. Part of being a responsible business owner is planning for the future and preparing for a worst-case scenario. Let Imagine Accounting help you with this task.
Need help to protect your small business’s future? Contact Imagine Accounting today.
