The ownership of business after the death of a shareholder

The ownership of business after the death of a shareholder

Authors: Petra Zvržina, Ažbe Tušar

In the past months, we have probably all faced our mortality and have wondered how will things that we started in life continue once we are gone. For business owners, this also concerns their businesses.

What exactly does happen with the ownership of a business in the event of a shareholder’s death and how can the inheritance be arranged? There are always two options: to do something or do nothing. In this article, we will present the first option. In our next article, we will focus on the proactive option – what can one do to assure that his/her will be respected after death to the greatest extent possible.

Inheritance of a business share is possible on the basis of a legislative act or on the basis of a testament (i.e. one-sided legal transaction, with which the deceased decides who is/are the heir/s). If the deceased does nothing and there is no testament, the intestate succession will come in place, on the basis of which the property of the deceased will be distributed in orders of succession, namely:

  • First order of succession: the descendants and the spouse of the deceased, at identical shares;
  • Second order of succession: (in case there are no descendants) the parents and the spouse of the deceased. Parents will inherit one half of the property at identical shares, and the spouse will inherit the other half;
  • Third order of succession: (in case there are no descendants, neither spouse or parents) the grandparents of the deceased. One half of the property shall be inherited by the grandparents on the deceased’s father side and the other half on the mother’s side.

The transfer of property ownership takes place at the moment of the deceased’s death. The business share is therefore in ownership of heirs from the time of death (upon condition that the deceased made no testament), meaning that the heirs are at that time already the shareholders or the co-owners of the business share and shall administer the company. In case there are several heirs, they inherit the hereditary share jointly – they become the co-owners of the share, meaning that there arises a so-called hereditary community. Until the property is divided, the heirs manage the business share together and unanimously, and such manner of managing a company can be quite difficult. Should there arise a need for certain activities in the company (e.g. naming of a new director, confirmation of a certain transaction by the assembly etc.) and the heirs do not manage the company in a proper manner, it can, to a certain extent, be a detriment to the company.

It should also be pointed out that the heirs may waive the right to heritage with an irrevocable statement, usually also valid for their descendants. The consequence of the waiver is that the heirs are not responsible for any debts of the deceased. If there are no heirs that would inherit the property, and there are no heirs claiming their right to heritage in 1 year from when the court issues a call for persons that think they might have any right to heritage, the business share becomes property of the Republic of Slovenia, which may liquidate the company.

At division of the property of the deceased, the heirs may in practice decide to divide their joint shareholding, with which the community will cease to exist and the co-ownership will arise. The business share may be divided into several business shares, however, one of the heirs may also decide to repay the other heirs the value of their shares and become the sole owner of the business share.

Focusing on the limited liability company (d.o.o. or LLC), in case of a single-member company (company, in which there is only one shareholder and one business share), the division of a business share will mean that the company becomes a multi-member company and the shareholders will have to conclude new articles of association, since the initial one for a single-member company will not suffice. In case of a LLC where there were several business shares and shareholders already at the time of the shareholder’s death, several new shareholders may arise (as many as there are heirs), which can result in a shift in “power” of the shareholders.

Namely, without the deceased’s activity, their business share will be inherited by their legal heirs, and it is up to them to decide, how they will further manage their joint ownership – if they decide to accept it. In any case, there is an option to conclude an agreement (the settlement) between the heirs in the inheritance proceedings, on how exactly the business share will be divided.

If the deceased makes no specific decision with a testament, this brings a lot of uncertainty as to what will happen with their business share, and consequently also with the business itself, after their death. Stay “tuned” for our next article on inheritance law in which we will look into what the deceased can do to avoid this uncertainty at least to a certain extent, especially in the context of their property as a shareholder in a LLC.