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This post was last updated 1 month ago by Yusuf Odukoya.
Have you always wondered what would happen to your company in the event of your death? Will it be dissolved or will the shares be passed on to your descendants?
Entrepreneurs keep asking me these questions. However, there is great uncertainty here, especially in the area of corporate succession.
What is Corporate Succession?
Corporate Succession is the passing of leadership roles—often the ownership of a company—to an employee or group of employees. This practice is also known as “replacement planning,” it ensures that businesses continue to run smoothly after a company’s most important people move on to new opportunities, retire, or pass away.
Many entrepreneurs are concerned that their many years of hard work might end up in the wrong hands after they are gone.
With this blog post I would like to answer the most frequently asked questions my clients have on this topic. You will find out what effects the death of the entrepreneur has with different legal forms (Sole Proprietorship, Company, Incorporated Trustees, Limited Partnership, and Limited Liability Partnership) and what legal consequences your departure has for your heirs or next-of-kin.
Because whether a company is dissolved or continued seamlessly depends above all on the legal form. In the next section, I will explain in detail what effects the death of the entrepreneur has on Sole Proprietorships, Limited Partnership, and Limited Liability Company.
Effect of An Entrepreneur’s Death
…In a Sole Proprietorship
First, a distinction has to be made here between effects under civil law and tax law.
Under civil law, it depends on whether the deceased entrepreneur registered his business or not. If the deceased did not a register their business or company, then the company is “invisible” under the civil law, and will be “dissolved” upon death.
In the case of a registered merchant, the company always passes to the heirs.
From a tax point of view, it makes no difference whether it was a registered company or not.
The heirs always have a limited time to decide whether they want to continue the company or not.
If the company is not continued, the company is retrospectively terminated with the last day of life. Then a final tax balance must also be made on this day. If the profit has not yet been determined by a balance sheet, a reconciliation must also be made. The company is then deemed to have ended.
Possible tax debts fall into the inheritance and must be paid by the heirs. However, the company’s tax claims also fall under the inheritance. In this case, the heir can benefit from a possible tax refund.
If the company is to be continued, you do not have to carry out these points. Your descendants can simply continue to run the company.
…In A Limited Partnership
In the case of a Limited Partnership, the succession depends on the company’s articles of association. Because company law takes precedence over inheritance law in this case.
There are 3 possible situations for limited partners:
- No succession regulation in the Articles of Association: Here, the shares are transferred to the persons already involved in the company. Their heir, however, do not go empty-handed, but are entitled to a lump-sum settlement. In technical terminology, this procedure is referred to as accretion (or growth).
- Qualified succession plan: In this case, a person named in the articles of association will succeed you. Other legal heirs are entitled to a lump-sum settlement.
- Simple succession plan: It is stipulated in the articles of association that the legal heirs receive the company shares. If there are several heirs, each individual partner becomes a limited partner.
In the case of general partners, it depends on whether it is a natural or a legal person.
If the deceased general partner is a natural person, inheritance law applies. This means that the shares are divided among the legal heirs.
… In A Limited Liability Company (LLC)
Similar to the Limited Partnership, the succession in a Limited Liability Company also depends on the company’s articles of association.
3 situations are conceivable here:
- Collection clause in the Articles of Association: In the case of a collection clause, the shares are transferred to shareholders who are already involved. The legal heirs of the deceased entrepreneur are entitled to a capital settlement, but do not become shareholders. This situation is comparable to the “accretion” in the Limited Partnership.
- Assignment clause in the Articles of Association: Here the shares are inherited by a person specified in the Articles of Association. An assignment clause is therefore comparable to the qualified succession plan in a Limited Partnership.
- No provision in the Articles of Association: In this case, the shares go to the legal heirs. If there are several heirs, each of them becomes a partner in the LLC.
So think carefully about what should happen to your shares in the event of your death and, if necessary, write down a provision for that in the Articles of Association.
Effects for your heirs: inheritance tax!
If your shares in the company are passed on to the legal heirs, they are subject to inheritance tax. If you and your company are not prepared for a transition, your heirs can be burdened with thousands of US Dollars in inheritance tax. This could easily translate into millions of Naira in a country like Nigeria.
However, if you have planned ahead and optimized your company, you can pass on your shares without burdening your heirs with high inheritance tax payments.
Conclusion: Legal form and statutes are decisive in the event of death
What happens to your company after you die depends primarily on the company’s legal form and the company’s Articles of Association. In the Articles of Association, for example, a specific person can be stipulated as the successor.
However, it can also be stipulated that your shares go to co-shareholders and your heirs only receive a lump-sum payment.
So you must therefore start planning your succession ahead of time because a legally clean and tax-optimized succession has to be arranged a few years in advance.
Do you have any further questions on this subject? or would you like to know how best to plan you company’s succession?
DISCLAIMER: I am not a certified Legal Advisor. I have only learnt all the above from my years of research and reading various books in Business Law.