Small businesses make up a large percentage of the Ontario business community and a good number of these small businesses are organized as sole proprietorships. Although a sole proprietorship is in many ways the simplest form that a business can take, the estate planning issues involved in the testamentary transfers of such small businesses are not always that simple.
For example, upon the death of a sole proprietor, the small business being carried on by the sole proprietor is effectively terminated. Pursuant to the provisions of her Will, the sole proprietor can transfer assets of the small business to a named beneficiary, who can in turn establish a new sole proprietorship. However, unless a contrary intention is expressed in the Will, this named beneficiary will acquire the small business assets free and clear of all debts and liabilities of the testatrix, leaving the residuary beneficiaries of the Will to bear the burden of such debts and liabilities.
In the event that a sole proprietor wishes to transfer his “small business” to a particular beneficiary, such as a son or daughter, with the residuary estate being divided among other family members, care must be taken to ensure that the debts and liabilities of the “small business” are appropriately apportioned among the residuary beneficiaries and the particular beneficiary.
It is also necessary to ensure that the small business property being disposed of by the Will is correctly described, with more specific language being used than simply the “business” of the testator. As a sole proprietorship has no independent existence separate and apart from its owner, using the term “business” to describe the property being gifted may be confusing as it provides no certainty with respect to the assets that the testator intends to gift.
Simply speaking, business estate planning issues can be complex, no matter how small or large the business.