When the Deceased Owned a Business: What Happens to It

The entity type decides almost everything

The single most important question is what legal form the business took, because it determines whether the business itself falls into the estate or only an interest in it does.

• Sole proprietorship: there is no separate legal entity. The business assets, the debtors, the stock and the debts are the deceased's own, and all of them fall into the estate. The business effectively stops at death unless the executor is authorised to continue trading.
• Partnership: at common law a partnership dissolves on the death of a partner unless the partnership agreement provides otherwise. What falls into the estate is the deceased's share of the partnership's net value after the affairs are wound up or the surviving partners buy the share out.
• Private company (Pty Ltd): the company carries on unaffected. What falls into the estate is the deceased's SHARES, not the company's assets. The company's own property, contracts and bank accounts are not estate assets.
• Close corporation: the member's interest falls into the estate. What can be done with it is governed by the Close Corporations Act and any association agreement, which commonly gives the remaining members rights over it.
• Trust: assets held by a trust are not estate assets at all, because the deceased did not own them. What may be an estate asset is a loan account the deceased held against the trust, and those loan accounts are frequently the largest single item in an estate nobody expected.

Read the founding documents before doing anything

• The Memorandum of Incorporation of a company often contains pre-emption rights, meaning the shares must first be offered to the existing shareholders before they can pass to an heir.
• A shareholders' agreement or an association agreement may compel a sale on death and fix how the price is calculated.
• A buy and sell agreement, usually funded by life policies on each owner's life, obliges the survivors to buy and the estate to sell at an agreed formula. Where one exists, the estate receives cash rather than an unsellable minority stake, which is normally a much better outcome for the heirs.
• A partnership agreement may allow the partnership to continue and provide for the deceased's share to be paid out over time.
• Where a buy and sell arrangement exists, check how the policies are structured. Correctly set up, the proceeds go to the surviving owners who then buy the interest. Set up badly, the same money can be pulled into the deceased estate and taxed differently.

Can the business keep trading?

For a company or a close corporation, yes, because the entity is separate and survives the shareholder or member. Directors continue to run it. The practical problem is usually signing authority on the bank account, which frequently sat with the deceased alone, and that can paralyse an otherwise healthy business for weeks.

For a sole proprietorship it is much harder. Trading on requires the executor's authority, and an executor who continues a business is taking on risk in an office that is really designed to wind things up rather than run them. It is often done under a specific mandate from the heirs, with the Master informed.

Either way, the first calls to make are to the bank about signatories, to the key customers and suppliers so contracts are not cancelled for non-performance, and to any employees, whose contracts do not automatically end when an owner dies.

Valuing the interest

The estate has to put a value on the shares or member's interest in the inventory and again in the liquidation account, and both the Master and SARS may look at it.

Where a shareholders' or buy and sell agreement fixes a formula, that formula is usually the answer. Where nothing fixes it, the estate needs a defensible valuation, normally prepared by an accountant, taking account of the fact that a minority stake in a private company with pre-emption rights is worth materially less than a proportionate slice of the company's net asset value.

This valuation also drives the estate duty position and the capital gains calculation on the deemed disposal at death, so it is not a formality.

Do not forget the compliance tail

• CIPC still expects annual returns from the company or close corporation. Nobody is excused because a director died.
• If the deceased was the public officer of a company for SARS purposes, a new public officer must be appointed, and SARS will not deal with the company properly until that is done.
• If the deceased was the sole director, the company may be unable to act at all until the shares pass and a new director is appointed. This is a genuine trap in one-person companies.
• Personal surety given by the deceased for the business's debts is a claim against the estate, and it is one families frequently discover only when the creditor lodges it.

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