Succession of a share in a business

Drafting a Will

A Will forms the foundation of any succession plan. It is essential for the person drafting the Will to carefully consider its terms to ensure their estate is distributed in accordance with their wishes. This becomes particularly important when a business asset is involved.

Without a Will in place, a share in a partnership could unintentionally pass to:

• A person with no interest in continuing the partnership.
• A person who lacks the skills or experience to manage the business effectively.
• Several people who may have conflicting ideas about the operations of the partnership.

A poorly drafted Will could lead to disputes between beneficiaries and create complications for the remaining business partners.

Death of a partner

According to the Partnership Act 1890, the default legal position is that a partnership is dissolved on the death of a partner unless the partnership agreement explicitly provides otherwise. Therefore, the provisions of a partnership agreement are critical when drafting a Will.

Subject to the terms of the agreement, a partner’s share of the business can generally be gifted under their Will. However, any provisions in the partnership agreement that override or restrict such a gift must be carefully reviewed.

Where a partnership agreement is in place, its terms will govern what happens on the death of a partner and will take precedence over the default provisions of the Partnership Act 1890. In most cases, such agreements provide that the deceased partner’s interest in the partnership comes to an end on death and is converted into a right for their estate to receive the value of that interest. Accordingly, even if a Will says to leave the deceased’s “share” in the partnership to a beneficiary, that beneficiary will not acquire any right to participate in the management or control of the business.

Instead, they will be entitled only to the financial value of the deceased partner’s share, as calculated in accordance with the partnership agreement, and will not become a partner without the agreement of the surviving partners.

Succession of a share in a partnership - example

A person owns a half share in a private practice, with the other half owned by a colleague. The partners have entered into a partnership agreement stating that the business will continue operating and remain solvent upon the death of either partner.

The partner wishes to leave their share of the partnership to a specific beneficiary who has discussed and agreed to maintain the partnership with the surviving colleague. In this scenario, an outright gift appears to be the most appropriate choice.

As circumstances change, however, the owner might update their Will to leave the share in trust instead. This allows for greater flexibility in the administration of the business interest, especially if the intended beneficiary is uncertain about their future role in the partnership.

Importance of regular reviews

It is crucial for business owners to review both their Will and partnership agreements regularly, especially after significant personal or professional events. This ensures that the terms remain consistent with their intentions and adaptable to changing circumstances. Reviewing your will alongside the partnership agreement helps ensure your estate planning reflects your intended wishes, provides clarity for your executors, and avoids unnecessary complications at what may already be a difficult time for your family.

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For specialist legal advice, please contact William Hollins or Pallvi Gami in our Private Client team.