For many business owners, the company is their largest asset and the source of their family’s income. Yet it is often the asset least addressed in estate planning. When an owner of an incorporated business dies, the executor is suddenly responsible for something that has employees, customers, bills and tax obligations, and that can’t simply be frozen while the estate is sorted out. Knowing how the law treats a business at death, and what documents can make the transition smoother, can make the difference between a business that survives and one that doesn’t.
The Company Doesn’t Die, but Its Owner Does
A corporation is a separate legal person, so it continues to exist after its owner dies. What the deceased owned was not the business itself but shares in the company. Those shares are personal property and form part of the estate. The executor named in the will steps into the deceased’s shoes as the holder of those shares, with the right to vote them, receive dividends and eventually transfer them to beneficiaries or sell them.
What does not pass to the executor is the deceased’s role as a director or officer. Those positions end on death. The executor becomes, in effect, the shareholder, but not automatically the person running the company. That distinction drives many of the practical problems that follow.
Does the Executor Need a Grant of Probate?
An executor’s authority comes from the will and exists from the moment of death. A grant of probate doesn’t create that authority; it confirms it, giving third parties a court-issued document they can rely on. Whether probate is actually needed therefore depends on who the executor has to deal with and whether they will accept the will alone.
For shares of a private company, the company itself controls its share register. If there are surviving directors who are comfortable recognizing the executor, they may be able to register the transfer of shares to the executor or beneficiaries without a grant, provided the company’s articles and any shareholder agreement allow it. In practice, however, many directors, lawyers and accountants will want to see a grant before registering a transfer, particularly where there is any risk of a later will surfacing or a challenge to the will.
Banks are often the deciding factor. If the company’s bank needs to update signing authority, or if the deceased also held personal accounts, investments or real estate, a grant of probate is frequently required regardless. The executor should assume probate will likely be needed and plan accordingly, while recognizing that in some closely held companies the shares themselves can be dealt with more informally.
For help with obtaining a Grant of Probate, click here.
Sole Shareholder vs. Multiple Shareholders
The situation is most difficult where the deceased was the only shareholder and the only director, which is common for small owner-operated businesses. On death, the company has no one with authority to act. No one can sign cheques, authorize payroll, sign contracts or pass resolutions. The company is essentially paralyzed until the executor, voting the deceased’s shares, elects a new director. Because the bank and others will want proof that the executor has authority to vote those shares, a grant of probate is often required before the new director can be recognized. That can take weeks or months, during which the business is exposed.
Where there are multiple shareholders and directors, the company can usually keep operating, because surviving directors still have authority to manage its affairs. The problems here are different. The deceased’s shares pass to the estate, and ultimately to beneficiaries who may be a spouse or children with no interest or experience in the business. Surviving shareholders may find themselves in business with people they didn’t choose, while the estate may be left holding a minority interest in a private company that has no ready market and pays no dividends. Disputes over value, control and whether anyone is obligated to buy the shares are common.
Why Unanimous Shareholder Agreements Matter
A unanimous shareholder agreement (USA) is the most effective tool for addressing these problems in advance. A well-drafted USA can set out exactly what happens to a shareholder’s shares on death or incapacity, typically requiring or allowing the surviving shareholders or the company to buy them. It can establish a valuation method so that price is not left to negotiation between grieving family members and business partners. It can also provide for funding, often through life insurance held on each shareholder, so the purchase doesn’t drain the company or the survivors.
For the estate, this provides certainty and liquidity: the family receives fair value in cash rather than an illiquid minority stake. For the surviving owners, it protects control of the business. Without a USA, both sides are left to rely on the company’s articles, which usually say little beyond restricting share transfers, and on goodwill that may not survive a difficult negotiation.
Keeping the Business Running
The practical pressures begin immediately. Employees must be paid, and the company remains responsible for remitting source deductions and GST. Directors can be personally liable for unremitted amounts, which is one reason new directors must be appointed quickly and must understand what they are taking on. Suppliers, landlords and lenders need to be dealt with, and leases, licences and loan agreements should be reviewed, since some contain provisions triggered by an owner’s death or a change of control.
Much of the knowledge needed to run a small business also lives in the owner’s head: passwords, key customer relationships, pricing and the location of important records. An executor who has to reconstruct that information from scratch is at a serious disadvantage. Tax is another significant issue. On death, the deceased is generally deemed to have disposed of their shares at fair market value, which can trigger a large capital gain. Post-mortem tax planning can reduce or avoid double taxation, but it is time-sensitive and requires early advice from an accountant.
The Importance of Planning
Almost every one of these problems can be reduced with planning. A will should specifically address the business: who the executor is, whether they have the skills to deal with a company, and whether they have express powers to hold shares, act as a director or appoint directors, continue the business and decide when to sell.
An enduring power of attorney matters too, because incapacity can be just as disruptive as death. An attorney can generally deal with the person’s shares as property, but cannot step into the role of director, since that office is personal. Business owners should consider having more than one director or a clear plan for appointing a replacement.
Finally, where there are business partners, a unanimous shareholder agreement should work hand in hand with each owner’s will and power of attorney, so that the documents point in the same direction rather than contradicting each other.
A business can survive the death of its owner, but only if the owner has planned for it. Reviewing your will, power of attorney and shareholder arrangements together is one of the most valuable steps a business owner can take for their family, employees and partners.
If you are a business owner in Alberta, it is important that you seek legal and accounting advice to address these important documents.
This article provides general information only and is not legal advice. Please consult a lawyer about your specific circumstances.
