If you’re planning to start a business, it’s really important to ensure you cover everything, including all the potential what-ifs. Some situations may be more daunting than others, such as the unfortunate death of key individuals in the business – like directors or shareholders – and it’s crucial to prepare for these types of scenarios.

While it’s something you probably don’t want to think about, it’s definitely worth exploring what you can do now to help minimise stress and disruption at a difficult point in the future.

In a nutshell, shareholders own part of a company through shares, while directors manage the business and its operations.

Shareholders are often referred to as ‘members’, and can be an individual, a partnership, another company, or even an organisation. A director takes a more ‘hands-on’ role within the business – taking on tasks such as managing the team, employing staff, managing payroll, and registering for VAT.

This depends on the type of shares the members own. Some may have more say than others, but most shareholders typically:

• Invest money into the business
• Make decisions such as which powers to grant to directors
• Set directors’ salaries
• Attend board meetings

As well as determining how much power they have within the business, different ‘classes’ of shares also dictate how much they receive in dividends from the profits.

Directors look after the day-to-day running of the business. They usually have more responsibilities than shareholders do, and must ensure everything runs smoothly. Typical duties involve:

• Looking after payroll
• Hiring staff (and on some occasions letting staff go)
• Submitting the Company Tax Returns and paying Corporation Tax on time
• Managing staff and other resources
• Organising things such as shareholders’ meetings (basically ensuring shareholders have regular updates on the how the investments they’ve made are performing).

If the shareholder is the only person who owns their shares, they’ll pass onto their personal representative or ‘executor’ in a process known as transmission. The executor is responsible for carrying out the instructions in the will if there is one, and handling the deceased’s possessions, bank accounts, and any shares.
 

Where does the articles of association and shareholders’ agreement come into this?

There may be a shareholder’s agreement or provisions in the company’s articles of association (the rules which set out how the company should be run) which affect what happens with the shares.

In many cases the articles will acknowledge someone’s right to inherit the shares, but without granting them the right to vote or attend meetings unless they register.

Unfortunately, situations like this can cause issues, but there are things that you can do to minimise the risk of clashes with other shareholders, and disruption to your business.

For instance, making your shares ‘compulsory transfers’ means the company can buy them back or sell them to existing shareholders upon the death of the shareholder in question.

Paying tax if you inherit shares

It’s also worth making sure that the new shareholder understands their taxpaying responsibilities if they receive money as a result of inheriting them. For instance, if they sell the shares, or receive dividends and need to pay dividend tax.
 

There are two scenarios for this type of situation, depending on whether or not there are other directors in the business.

There are still existing directors

If there are other surviving directors, they can normally continue running things as normal, sharing out the deceased director’s responsibilities – as long as the company’s articles of association allow it. Some companies require a minimum number of directors, in which case a new director will need to be appointed.

The sole director has died

A private company must have at least one ‘natural’ (human) director in order to be compliant with Companies House rules. If this person dies but there are other shareholders, they can hold a meeting to appoint a new company director or put themselves forward for the role.

This is an incredibly unfortunate situation, with two outcomes depending on when the business was incorporated.

If the company was incorporated before 2009, the personal representative of the deceased will need to seek a court order to appoint a new director.

It’s much easier if the company was incorporated after 2009. The personal representative can appoint a new director, which is much less costly than going to court.

If this seems too complicated, you can always revisit your articles to make more flexible arrangements – or, better yet, appoint a second director.