What Happens if a Director or Shareholder Dies?
For individuals considering embarking on a business journey, comprehensive coverage is key – encompassing all potential scenarios, even the less appealing ones. Among these, the potential passing of critical figures in the business, such as directors or shareholders, requires thoughtful preparation. While contemplating such events might be uncomfortable, proactively exploring preventive measures now can greatly alleviate stress and upheaval during challenging moments in the future.
In essence, shareholders hold portions of a company through shares, while directors oversee the business and its functions.
Commonly referred to as 'members,' shareholders can encompass individuals, partnerships, other companies, or even organizations. Directors assume a more hands-on role, engaging in tasks like team management, staff recruitment, payroll administration, and VAT registration.
Learn more about the Distinction between Shareholders and Directors.
Unpacking the Role of Shareholders
The role of shareholders varies based on the type of shares held. While some exert greater influence, most shareholders typically:
Invest capital in the business Participate in decisions, including granting powers to directors Determine directors' remuneration Attend board meetings Additionally, diverse 'classes' of shares dictate the dividends shareholders receive from profits.
Understanding the Responsibilities of Directors
Directors are responsible for overseeing the day-to-day operations of the business. They often bear more significant responsibilities than shareholders and must ensure the smooth functioning of all aspects. Typical duties include:
Managing payroll Employing staff (and occasionally overseeing staff exits) Submitting Company Tax Returns and ensuring timely Corporation Tax payment Overseeing staff and other resources Organizing shareholder meetings to provide regular updates on investment performance
Navigating the Scenario of a Deceased Shareholder
In the unfortunate event of a shareholder's passing, a process known as transmission occurs when the shareholder solely owns the shares. During this process, the personal representative or executor carries out instructions from the will (if present) and manages the deceased's possessions, bank accounts, and shares.
In the case of joint shares and a partner's death, the surviving partner automatically assumes the title to the shares.
Considering the Role of Articles of Association and Shareholders' Agreements
Articles of association and shareholders' agreements may influence share disposition. These documents determine what transpires with the shares, acknowledging someone's right to inherit them, although often withholding the right to vote or attend meetings until registration.
This practice serves to prevent placing individuals with limited knowledge or interest in the business in positions of significant decision-making power.
Addressing Tax Implications of Inherited Shares
Educating new shareholders about their tax obligations is essential upon inheriting shares. If they sell shares or receive dividends, these actions entail tax implications that necessitate understanding and compliance.
Guidelines for Navigating the Passing of a Director
Two scenarios arise based on the presence of other directors:
Existing directors can usually continue operations and share the responsibilities of the deceased director – provided the company's articles of association permit it. Some firms mandate a minimum number of directors, necessitating the appointment of a new director.
In the event of the sole director's passing, private companies must have at least one 'natural' (human) director to comply with Companies House regulations. If this director passes and other shareholders exist, a meeting can be held to appoint a new company director or nominate one from among the shareholders.
Handling the Unique Situation of a Deceased Director and Sole Shareholder
In instances where the sole director also holds sole ownership of the business, outcomes differ based on the incorporation date:
For companies established before 2009, the personal representative of the deceased must secure a court order to appoint a new director.
Post-2009 incorporations offer a simpler process, allowing the personal representative to appoint a new director without resorting to court action.
Should these options seem intricate, revisiting articles of association to introduce greater flexibility or appointing a second director can be considered.
Guidance for Moving Forward
For sole directors operating under the 1985 Companies Act's Table A articles, amending shareholder agreements to protect family, friends, and co-shareholders from undue burdens is essential.
Even if your circumstances don't align with these categories, evaluating existing arrangements and making adjustments for enhanced flexibility in unforeseen situations is prudent.
