Reading time: 6 minutes

A sole trader is a simple, inexpensive and flexible business structure if you are looking to conduct business in your own name. However, as a sole trader, you operate your business on your own. Hence, you should consider implementing a succession plan for your business in the event that you pass away. This article will explain:

  • what a sole trader is;
  • succession planning considerations;
  • how to determine your business’ dealings and takeover; and
  • a post-death course of action.

What Is a Sole Trader?

Sole trader refers to an individual who operates a business under their own name. They are personally liable for all obligations and liabilities of the business. As a sole trader, any profit your business earns is also your personal income. The law does not differentiate between you, as the sole trader, and your business. Consequently, when you pass away, there is a question as to what happens to your business. The death of a sole trader can result in serious shifts to the business, as your business technically concludes upon your death. 

Succession Planning for Sole Traders

Unlike operating a business through a proprietary company structure, assigning a sole trading business to someone else after an original owner’s death is challenging. Your will may reflect succession requests. However, it is not possible to divide the capital gain from the sale of your business assets between family members. If the business is operating at a loss, creditors may put your personal assets at risk to pay them back what your business owes.

As a sole trader, you may pass away without having appointed a Corporate Power of Attorney. Accordingly, all business-related affairs halt until the person appointed as executor under your will can take over and deal with the business as per the will. 

Commonly, sole traders’ business bank accounts are protected on death. Likewise, legal personal representatives (LPRs) cannot access them until probate is approved. If you pass away without a will, this typically leaves the business without any authorised person to manage the business’ affairs until the Courts grants Letters of Administration

Determining the Business’ Dealings and Takeover

The application for Probate and Applications for Grant of Letters of Administration are partial to considerable delays. Since it can be a long process before your executor can distribute the estate, your will should contain provisions authorising the executor to appoint a replacement operator immediately. This is a better alternative to necessitating a sale and distribution of the assets of the business. As a sole trader, it is sensible for you to include such a clause in your will if you want your business to continue after your death.

From the very early stages of your business, it is essential to maintain any documents that illustrate your investments or statements showing the value of the business. These documents are critical to determining the total value of your holdings upon death. As a sole trader, all assets and liabilities of your business form part of your estate. Everything in your business will subsequently form part of your estate. 

Post-Death Course of Action

If someone you know is a sole trader and has recently passed, this section is relevant for you. 

After the death of a sole trader, the first step is to check if they retained a constitution, by-laws or other types of contract and rules that govern a post-death course of action. Such documents can assist in determining the assets and liabilities that may form part of their estate. A deceased estate’s right to an Australian Business Number (ABN) relies on the legal personal representative (LPR) continuing an enterprise to conclude the affairs of the estate. 

Applicants must be one of the following:

  • an executor or administrator with a grant of probate or letters of administration;
  • a public trustee with a certificate of authority; or
  • appointed as administrator of the deceased estate by a court.

LPRs of the deceased sole trader are often eager to continue operating the sole’s trader business quickly. However, this can generate significant risk for them as an ABN held by the deceased sole trader may not be used for business purposes after the person’s death. 

In all cases, when LPRs are keen to resume the operation of the business, they require an express authority to do so. This authority derives from the sole trader’s will. Even when a sole trader’s will enables the businesses’ succession, contracts, like employment contracts, firmly terminate upon the sole trader’s death. Should the business continue running under the LPRs, employees may transfer over and become employees of the LPRs. Therefore, LPRs must renew employment contracts to ensure that employment law adequate covers employees.

Key Takeaways

A sole trader’s business typically concludes on the death of its original owner. As a sole trader, you can leave the business in a will to a beneficiary when you pass away. However, this does not ensure that succession must occur nor recognise or bind the recipient to resume the business. It is best to consider succession planning and decide on matters for business’ takeover to protect your business following your death. For more information on your sole trader business or the transfer of employees, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is a sole trader?

A sole trader is an individual who operates a business under their own name and is personally liable for all obligations and liabilities of the business. As a sole trader, any profit your business earns is also your personal income.

If I pass away, does my sole trader business go to my family members?

Family members commonly assume that they can instantaneously continue running the sole trader’s business after the death. This is in fact unlawful. While your will may reflect succession requests, it is not possible to divide the capital gain from the sale of your business assets between family members.

Is it important to have a will?

Protecting your sole trader business in your will allows you to choose an authorised person to look after your business upon your death. Importantly, it does not automatically ensure that succession must occur or bind the recipient to resume the business. However, a will leave a post-death course of action for your business – whether you wish to see it continue operation or have your beneficially sell its assets.

Webinars

Australia’s Global Talent Visa: How to Attract Top Talent

Thursday 7 October | 11:00 - 11:45am

Online
Understand how to navigate Australia’s complex migration system to attract top overseas talent with our free webinar.
Register Now

5 Essential Contracts for your Online Business

Thursday 14 October | 11:00 - 11:45am

Online
Learn which key contracts will best protect your online business with our free webinar.
Register Now

Key Considerations When Buying a Business

Thursday 11 November | 11:00 - 11:45am

Online
Learn which questions to ask when buying a business to avoid legal and operational pitfalls, so you can hit the ground running. Join our free webinar.
Register Now

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

The majority of our clients are LVConnect members. By becoming a member, you can stay ahead of legal issues while staying on top of costs. From just $119 per week, get all your contracts sorted, trade marks registered and questions answered by experienced business lawyers.

Learn more about LVConnect

Need Legal Help? Get a Free Fixed-Fee Quote

If you would like to receive a free fixed-fee quote or get in touch with our team, fill out the form below.

Our Awards

  • 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Winner – Australasian Lawyer
  • 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year - Australasian Law Awards
  • 2019 Most Innovative Firm - Australasian Lawyer