Business Estate Planning: Sole Trader

When you're a Sole Trader it can feel impossible to separate yourself from your job. What most Sole Traders don't realise is when it comes to the law, you and your job are entirely inseparable.

Sole Trader

When it comes to the law there is no distinction between you and your sole trader business.

Being a sole trader offers tens of thousands of Australians the opportunity to build, own and grow their own business without the costs and administrative requirements involved in setting up a Company.

If you're operating a business where you alone trade time or skills for money the ABN business structure holds limited risk (unless you never do your tax returns and regularly forget to invoice your clients - but that's a story for another day).

But whilst being a sole trader definitely comes with its perks, it also comes with its disadvantages, none more so than when you die.

What happens to my sole trader business if I die?

All those days you feel like the line between you and your business is verrrrrrry thin..... on the day you die that line becomes non-existent.

What many business owners don't realise is when a sole trader dies their business dies with them. Immediately.

Because when it comes to the law there is absolutely no distinction between you and your sole trade business.

Now that's not such a big deal if you're operating a sole trade business the way they sell it on the box; you, on your own, trading your time or skills (or opinions or whatever it is you do for money) all by yourself. Sole. Trader.

In other words, other than the odd outstanding invoice and some client goodwill no matter how you shake it your business dying isn't going to stop the world or impact greatly on anyone else (unless like I said before you don't do your tax or send invoices - because both those things have a significant impact on the people managing your estate).

If however you run your business under an ABN, as a sole trader, but have staff, premises, trade suppliers, significant stock on hand, contractual obligations, or anything else that makes your business more complicated than being just you, on your own trading time for money.

Then your death and the immediate closure of your business will undoubtedly have significant flow-on effects, none of them of the good variety.

But surely someone can just keep running my business?

Many sole traders believe (incorrectly) that if they were to die a family members or staff would be able to step in and fill their shoes, continuing to operate business as usual.

I've had many a business owner turn up to their will making appointment armed with a detailed user manual outlining how to keep their business ship afloat in the event of their death - completely unaware that the minute they die their business ship is laying at the bottom of the ocean.

Of course, it's legally possible to nominate a personal representative in your will to continue running or close out your business activities - and I highly recommend every business person have a plan that includes a personal representative - however, when it comes to continuing a sole trader business there is a significant difference in the how that person will be expected to manage your business activities compared to someone who is managing the business activities within a company structure.

If you're a Sole Trader these things cease to be accessible after your death:

Your bank accounts
At death, your bank accounts will be frozen, including your business bank accounts. This means your personal representatives will be unable to access them until after probate is granted and any costs associated with running your business will become their personal responsibility until the estate is finalised. 

Your employees
At death, all employment contracts cease. Your representative will be required to renegotiate contracts with your staff, who may or may not feel as generous towards them as they do towards you. If their employment is not renewed, employees may be entitled to redundancy claims which could be significant and will need to be paid from your estate.

Your premises and stock
At death, your rental agreements and trade contracts cease. Any assets owned by your business will form part of your estate, which means any stock you have on hand is no longer available to be sold and any items you lease or rent are no longer available to your representative unless they renegotiate those contracts.

As a sole trader your personal representative (aka the executor of your estate) will be required to step in and cover, negotiate, and mangage these matters on your behalf.

Protecting the people you love

Being a sole trader may seem like an inexpensive and low-risk way of running a business until you consider the precarious position it puts your employees, colleagues, clients and most importantly your family if you were to die.

At the time of your death, it will become the responsibility of your estate to finalise any of your debts or outstanding financial obligations (including any business debts or obligations such as rent, leases or employment contracts).

As a sole trader these debts are yours alone - even if they've been generated by your business - and may mean your assets are used to pay out business expenses and contracts instead of looking after the needs of your family or loved ones.

To protect all your hard work and the value you have created in your business, if you are a sole trader, I can't recommend enough that you make a time to talk to your accountant (and me) about the best way to ensure your business can run smoothly after your death.

Don't leave it until it's too late.

Brave is kind.

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