What if anything should happen that would prevent you from continuing to run your business?
The success of a small business is very closely associated with the individual owner’s talents and skills, and if the owner should suddenly become ill or unable to carry on running the business problems are likely to arise very quickly and things can soon grind to a sticky halt.
How then to ensure that matters can be dealt with quickly and efficiently on your behalf by someone you trust?
If you become incapacitated
What would you do if you were to suffer an accident or illness and become unable to run the business due to mental incapacity?
A sole trader does not have a partner who can continue running the business and if they have not made any provision for succession, it can leave their family and beneficiaries, employees, contractors and clients with many intractable problems. Even in a partnership, succession formalities should always be in place.
In the event of death
One tends to think firstly about the death of the business owner. In order to protect your family and the business it is advisable to consider taking the following steps:
- Taking out life assurance policies so that funds are available to enable other partners or shareholders to buy out your interest in the business after your death, or simply to provide the business with extra working capital to tide it over a period of uncertainty.
- Regulating the succession by means of specific provisions in shareholders’ and partnership agreements.
- Ensuring that your Will is up to date and leaves the business to a suitable person, or makes other specific provision, for example the executors may be instructed to sell the business.
Inheritance Tax (IHT)
It is very important to ensure that you are aware of the relevant rules relating to IHT that would entitle the executors of your estate to claim Business Property Relief (BPR) – and thus get either 100% or 50% relief for IHT on business assets. (The actual rate of relief depends on the type of business property.)
The whole value of the business can be 100% exempt from IHT if you plan the business structure carefully. However BPR rules are complex and it is easy to lose the exemption – so it is worth taking proper advice.
Lasting Powers of Attorney
One of the simplest things to put in place to guard against financial problems arising out of a loss of mental capacity is the appointment of an attorney who could act in your stead if you lost the ability to make decisions about your property and affairs yourself.
A Lasting Power of Attorney is a legal document which allows you to appoint someone you trust to make decisions on your behalf about such things as your finances, if for any reason you became unable to attend to matters yourself.
Your appointed Attorney can do anything in relation to your property and financial affairs that you could do yourself, e.g. buy and sell property, manage your investments, open and close bank accounts, claim benefits and pensions and carry on your business.
In most cases, the attorney would probably act on your behalf and implement an ‘exit strategy’ – disposing of your interest in the business. The important advantage here is that the attorney can act promptly and with relative freedom so that there is not a protracted period of uncertainty or paralysis while applications are made to court for the appointment of a deputy or for directions about what can be done.
You are the person who knows the business best, and you are best placed to choose a suitable ‘caretaker’ in the form of an attorney – and you can also give the attorney instructions or guidance about what you would expect him or her to do.
An important part of your overall business planning should therefore include provisions for when and how the reigns of your business will be passed on to someone else under different circumstances.
- Consider all the alternatives, for example:
- Selling the firm
- Floating it
- Closing it
- Giving it away to a family member
- You may want to keep the business in the family, in which event you need to identify a suitable successor
- To what extent would you want to retain the right to continued involvement in the business?
- What if things do not go to plan? It is advisable to have contingency arrangements as well.
- If you may wish to sell the business then plan in advance so as to achieve the highest value!
- Keep Tax issues in mind, for example Capital Gains Tax and Inheritance Tax.
For more information please contact us at 01689 822554 or email firstname.lastname@example.org.