Part I – Sole Proprietorship
You've built a business plan for success. Now, it's time to build an estate plan for succession.
Over the next three articles, we will be focusing on estate planning for business owners. We have broken the articles down by the type of business structure you might choose. There are three basic options:
- a business owned by one individual personally where there is no legal distinction between the individual and the business. We call it a "sole proprietorship";
- an unincorporated business owned by two or more individuals, called a partnership; or
- a business operated through a corporation
Today's article focuses on the sole proprietorship.
When starting a business, most people think of the obvious things: business plans, marketing, sales, etc. But one thing a lot of business owners forget is to create an estate plan. You probably created this business with the goal of being profitable. It's equally important to plan for maximizing and distributing that accumulated profit when you pass away.
Today, we are looking at a sole proprietorship: a business owned by one person personally where there is no legal distinction between the individual and the business. The owner owns the assets, takes on the liabilities, and makes profits, all in his or her personal capacity.
Regardless of what you do, if you run the business personally, you need to understand how this can impact your estate and make a plan, so your loved ones are not left untangling a mess.
The first and most important question is: what do you want done with the business when you pass away?
How would you want the business handled? Does it make sense to wind it up or keep it running? Should it (or could it) be sold?
Consider if there is any value to the business without you. This is not about ego: a consulting business, for example, isn't likely to have much value without its consultant. But a store, whether online or in person, might be carried on after its owner dies. If there is value to the business after your death, consider if anyone might be available to operate it. The question is really about finding someone who is able and willing to step into your shoes. Otherwise, consider if it makes sense to sell the business altogether.
You now have a plan in your mind. Then, make sure that your plan will be laid out in your Will. In your Will, you can appoint someone you trust as an Executor of your Will and give instructions to your Executors on what you want done with the business considering the questions above.
In Ontario, if you die without a Will, your wishes about the business may not be carried out. Without a Will, no one is legally authorized to act on your behalf and deal with your business unless someone, possibly your friend or family, applies to the court to be appointed as "Estate Trustee Without a Will". Further, without a Will, there are no default instructions left about your business. Your Estate Trustee has the obligation to divide your estate, including your business, among your next-of-kin, according to the laws of succession. There may be conflict over who should apply to be appointed as Estate Trustee and uncertainty over what to do with your business.
Do you have business assets?
If you run your business personally, you own the assets and take on the liabilities personally. That means you are personally responsible for the lease, if any, and you have probably personally signed contracts for bank accounts, supplies, sales contracts, and the like.
Do you have separate online accounts (such as Instagram, Twitter, or Facebook) for your business? Do you run your business under a separate registered business name? Even if these accounts are for your business, you are still personally responsible for accessing and maintaining them. Any parties that you have contracts with, including website platforms, will need to be notified that you have passed away. Contracts, including online accounts, might be valuable. Think of a lease in a prime neighbourhood or Instagram or Facebook accounts with many followers.
Someone will need to evaluate all your contracts and decide if any are worth continuing, selling or assigning, or if it is better to simply terminate them. Any profits from your business after you pass away will form part of your estate.
As an aside, each website platform has its own rules for how to deal with an account when the user dies. The rules aren't always consistent. Leaving it to chance to decide who will manage these accounts risks a long, complicated process to deal with them, and risks losing any value the accounts may have.
With a Will, you can decide who makes decisions about your business contracts, and how to distribute the profits, contracts and/or assets from your business after your death. If you don't have a Will, there are default rules to distribute your estate, but these defaults only include specific family members and might leave out other people or charities you want to benefit. Also, if you die without a Will, the time and process to get access to your online accounts or digital assets would be longer and complicated.
Do you have a business account with the Canada Revenue Agency?
If you collect and remit Harmonized Sales Tax (HST), someone will need to close your HST account and file your final HST return. Someone will also need to file your final personal income tax return, close your business number, and close any other Canada Revenue Agency business accounts once all returns are filed.
The only way to pre-select someone to deal with these accounts and taxes when you pass away is through a Will. Otherwise, no one is authorized to deal with the Canada Revenue Agency. This can cause filing delays and risks interest charges and late filing penalties.
In the end, think of what you went through to set up your business: the hours of research and decisions it took to bring it to life. Now imagine if you leave all that without a roadmap for unwinding it or maximizing its value for your estate. An estate plan, which can be as simple as creating a Will, is critical to give your loved ones the starting point and make sure your affairs are looked after in death.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.