Owning a business means your personal and business affairs are often closely connected. Your shares or partnership interest may be among your most valuable assets. They can also be tied to employees, customers, family members and other owners.
That is why estate and business succession planning should not be treated as two completely separate projects. A plan for leaving the business needs to account for what happens to your ownership interest and what your estate documents say about it.
For Ontario business owners, this process can involve wills and powers of attorney as well as shareholder agreements, ownership structures and a plan for transferring or selling the business. The right approach depends on the business and the owner’s circumstances.
Why Estate Planning Belongs in an Exit Plan
An exit plan answers a business question: what happens when you are ready to step away?
Estate planning answers a personal and legal question: what happens to your assets and responsibilities if you die or become unable to manage your affairs?
For an owner, those questions can overlap. If you plan to transfer shares to a family member, sell the business to another owner or transition management to a successor, your estate documents should be considered alongside those arrangements.
Ontario says an estate plan helps set out what happens to a person’s property after death and who will manage the estate. A will can name an estate trustee and set out how property should be distributed. The province also notes that business owners with more complicated situations may wish to speak with a lawyer and other professional advisers.
The goal is not to create one document that solves every succession issue. It is to make sure the different parts of the plan work together.
Start With the Ownership Structure
Before deciding who should receive or take control of a business, it is useful to establish exactly what the owner owns.
A corporation, partnership and sole proprietorship can create different succession considerations. A corporate owner may hold shares rather than owning the business assets personally. A partnership interest can be governed by a partnership agreement. A sole proprietor’s business assets may form part of the owner’s personal estate.
The Canada Revenue Agency confirms that the effect of an owner’s retirement or death can depend on the business structure. For corporations, the corporation can continue operating when a shareholder dies, while the consequences for the shareholder’s interest still need to be addressed.
This makes the ownership structure an important starting point for legal planning.
Review Shareholder and Ownership Agreements
A business succession plan should not sit on its own if other ownership agreements already govern what happens to shares or interests.
For example, shareholders may have agreements addressing transfers, buyouts, decision-making or what happens when an owner dies or leaves the business. Ontario’s Business Corporations Act recognizes unanimous shareholder agreements and sets out rules affecting shareholders and transfers of shares subject to such agreements.
An estate plan should be reviewed alongside these documents. If the will says one thing while an existing corporate agreement creates a different process for ownership changes, the owner may not achieve the transition they expected.
This is one reason a lawyer who understands both business and estate matters can be useful when reviewing the complete plan.
Think About the Person Who Takes Over
Succession planning is not only about who receives the owner’s financial interest. It is also about who can take responsibility for the business.
A family member may inherit shares but have no role in day-to-day management. A key employee may be well positioned to manage operations but may not have the resources to acquire ownership. Another shareholder may already have rights under an existing agreement.
These are different outcomes, and they may require different legal arrangements.
A practical exit plan can identify the intended path and then consider the documents needed to support it. Depending on the situation, that may involve a share transfer, sale, buy-sell arrangement, corporate reorganization or other legal steps.
Plan for Incapacity as Well as Retirement and Death
An exit plan that only addresses retirement may leave a major gap.
A business owner could become unable to manage the company because of an accident, illness or other circumstance. The appropriate legal arrangements depend on the owner’s situation and the structure of the business.
This is where powers of attorney and business governance documents can become relevant. The owner should consider who could make personal and business decisions if they temporarily or permanently cannot do so.
The Ontario government recommends that people consider powers of attorney as part of planning for possible incapacity. For a business owner, that conversation can also be connected to the continuity of the company.
Consider the Family’s Needs
Business succession can affect more than the people working in the company.
If one child is involved in the business while another is not, an owner may want to consider how the estate will treat each child. Equal treatment does not always mean identical assets. A business interest may have a different value or practical role than other estate assets.
There may also be a spouse, other dependants or business partners whose interests need to be considered.
These decisions can be sensitive, particularly when family and business relationships overlap. Discussing the intended plan with the appropriate professional advisers can help identify conflicts before they become urgent.
Bring Tax Advice Into the Conversation
The legal structure of a succession plan can have tax consequences. The treatment can depend on factors such as the type of business, ownership structure, transaction and assets involved.
When a business owner dies, the CRA requires tax returns and may require reporting related to business income, property and other assets. A business may also need to close or transfer certain accounts depending on the circumstances.
This is why business succession planning should not be built around a legal document alone. A lawyer can work with the owner’s accountant or tax adviser so that legal steps and tax planning are considered together.
Build the Plan Before the Exit Is Urgent
Succession planning tends to work better when there is time to make decisions rather than when a sale, retirement or health event is already underway.
Start by identifying the desired outcome. Then review ownership documents, estate documents and the practical responsibilities involved in the transition.
For example, an owner might decide that a management successor should operate the company while another person receives a financial interest. That decision can then be discussed with legal and tax advisers to determine which documents and transactions may be appropriate.
The plan can also be revisited as the business changes. New shareholders, acquisitions, major asset purchases, family changes or a change in the intended successor can all be reasons to review the arrangements.
Business succession planning works best when it reflects the business you actually own today rather than the business you owned years ago.
Putting the Pieces Together
A business owner’s exit plan is not only about choosing a future buyer or successor. It also needs to account for what happens to the owner’s business interest as part of their broader estate and personal affairs.
A coordinated approach can bring together the will, powers of attorney, shareholder or partnership agreements, ownership structure and the intended transition. It can also create an opportunity for the owner to identify gaps while there is still time to address them.
Nesbitt Coulter LLP provides business development and estate planning services for clients in Southwestern Ontario. Its lawyers work in areas including business successions, shareholder rights, wills, trusts and powers of attorney.
If you are beginning to think about retirement, a business transfer or what would happen to your company if circumstances changed unexpectedly, speaking with a lawyer early can help you understand the legal issues that may need attention.
FAQs
Does a business owner need a separate succession plan?
A will alone may not address every issue involved in transferring or selling a business. Ownership agreements, management responsibilities and the intended transition can require separate planning alongside the estate plan.
Should a will be updated as part of business succession planning?
It can be appropriate to review a will when a business owner is changing ownership arrangements or developing an exit plan. The will should be considered alongside shareholder, partnership and other agreements so the documents work together.
When should a business owner start succession planning?
There is no single timeline that applies to every business. Starting before retirement or a planned sale can give the owner more time to consider potential successors, review legal documents and coordinate professional advice.