What Happens to a Business When the Owner Dies?

A sole trader has no legal existence separate from the individual who runs it. Contracts, most business bank accounts and any regulatory registrations are usually held in the owner's own name, so when the owner dies, the business itself generally comes to an end immediately, even though the underlying assets, such as stock, equipment, premises and outstanding invoices, remain part of the estate.

This can mean staff need to be told quickly, ongoing contracts may be affected, and any goodwill built up in the business can be lost if there is a gap before someone takes over. If you want the business to continue rather than simply be wound up and its assets sold, your will needs to say clearly who should take it over, and your executors need enough information and authority to keep it running, even briefly, while that handover happens.

Under the Partnership Act 1890, a partnership dissolves automatically on the death of any partner, unless the partnership agreement specifically provides otherwise. Where no such provision exists, this default rule can force a partnership to wind up even where the surviving partners want, and are able, to continue trading together, which is rarely what anyone actually wants.

A well-drafted partnership agreement will typically provide that the partnership continues among the surviving partners, set out how the deceased partner's share is valued and paid out, often referencing accounts or a formula, and may be supported by life insurance to fund the payment. If your partnership does not have an agreement covering this, or you are unsure what it says, get it reviewed.

A limited company is a separate legal person and does not cease to exist because a shareholder or director dies. What changes on death is the ownership of the shares themselves, which form part of the deceased's estate and pass to whoever is entitled under the will, or under the intestacy rules if there is no will, once the shares have been transmitted to the personal representatives.

This process, known as transmission, is usually governed by the company's model articles or bespoke articles of association, and any shareholders' agreement. These documents commonly include pre-emption rights, giving existing shareholders the first opportunity to buy the shares, or compulsory transfer provisions, which can override a simple gift in a will if not properly coordinated with what the will says.

Whatever the structure, executors need enough information to act quickly: details of the business's bank accounts, key contracts, any co-owners or partners, professional advisers such as the accountant, and where the relevant agreements are kept. A delay in locating this information can cause real damage to a trading business.

Executors may also need express powers in the will to carry on a business temporarily, borrow money, or bring in professional support, since their general powers under an ordinary will may not be sufficient to run a live business safely during administration of the estate.

Where a business has more than one owner, a cross-option agreement combined with life insurance held on trust is a common and effective way to make sure a deceased owner's family receives fair value quickly, while surviving owners retain full control of the business, without either side being forced into an unwanted outcome.

Setting this up correctly requires coordination between the business agreement, the insurance policy and the will, and is a specialist area worth discussing with a solicitor or business protection adviser rather than attempting informally.

A simple business interest with no co-owners and no restrictive agreements can often be dealt with adequately through an online will. Anything involving partners, co-shareholders, a shareholders' or partnership agreement, or a genuine wish to see the business continue in a particular way needs a solicitor's involvement to make sure everything works together.

Reviewing your will alongside your business agreements periodically, particularly after any change in ownership or structure, helps avoid the documents drifting out of step with each other.