What to do with a company when the owner dies?

What Happens to a Company When Its Owner Dies

Upon the death of a partner, their share does not cease to exist. The business share – meaning the partner's participation in the company and the set of rights and obligations associated with it – is an asset that becomes part of the estate. Under the Czech Business Corporations Act, the share passes to the heir or legal successor, unless the articles of association prohibit or restrict this transfer.

The key difference lies in the forms of companies. In a limited liability company (s.r.o.), the articles of association can restrict or completely exclude the inheritance of a share. In a joint-stock company and a housing cooperative, the law prohibits this – so shares will always pass to the heirs. Therefore, the content of the articles of association becomes one of the first documents to be studied at the moment of a partner's death.

For the company, this means one thing: on the day of death, nothing "solves itself." The company continues to exist, with its liabilities, employees, ongoing contracts, and due invoices, but the circle of people who can make decisions on its behalf has suddenly narrowed or completely disintegrated. Business knows no mourning – suppliers want to be paid, the bank monitors covenants, and employees expect their wages.

Three Questions to Answer First

In the very first days, it is useful to separate three levels that can easily merge for a layperson. First, who acts on behalf of the company externally (the statutory body). Second, who exercises the rights associated with the share while the probate proceedings are ongoing (heirs, administrator of the estate). And third, what are the options for the future (continuation, settlement, sale).

These three levels have different regimes, different deadlines, and different actors. When they are confused, mistakes arise – for example, heirs try to manage the company's operations, for which they are not authorized, or conversely, no one addresses the fact that the company is left without an executive director. Dividing the roles right at the beginning will save weeks of confusion.

The Interim Period of Probate Proceedings: The Most Dangerous Phase

Probate proceedings can take months, or even over a year for more complex estates. Throughout this time, it is not certain who will acquire the share. It is this interim period that companies most often underestimate, and it is during this time that the greatest damage occurs.

Who Exercises the Partner's Rights Until the Inheritance is Settled

Until a final decision on the inheritance is made, the heirs must agree on who will exercise the rights associated with the share. If they cannot agree and an administrator of the estate (a person managing the deceased's property during the proceedings) has not been appointed, the court handling the estate can appoint one at the proposal of the company or one of the heirs. This administrator is authorized to exercise all rights associated with the share – including voting at the general meeting.

In practice, this is often a source of disputes. Before the court appoints an administrator, the general meeting may not have a quorum, the financial statements cannot be approved, a new executive director cannot be appointed, and no decision can be made on a loan. If the deceased was a majority partner, the company can find itself in a decision-making vacuum for crucial weeks.

The role of administrator can also be taken on by an executor of the will, if the deceased appointed one during their lifetime. That is why it pays to think about this eventuality when drafting a will – a pre-appointed person will save the company uncertainty and court proceedings.

When the Sole Executive Director Dies

The situation is exceptionally dangerous when the owner was also the sole executive director. With the death of the statutory body, the company loses the person authorized to act on its behalf – no one can sign contracts, payroll, tax filings, or respond to a notice from an authority. Although the court can appoint a guardian, this is an emergency and time-consuming solution.

The consequences are often very concrete: payment delays, contractual penalties, terminations by customers, missed deadlines with the tax authority, and reputational damage with business partners. The longer this state persists, the harder it is to rectify. For companies with a single owner-executive director, setting up a backup solution (such as a second executive director) is therefore one of the most important preventive measures that can be taken.

What Company Operations Won't Wait For

While the inheritance is being settled, the company's day-to-day operations continue and generate obligations. Banks may block account transactions after the death of a person with signing authority until the authorization of a new person is documented. Employees are entitled to their wages regardless of who owns the company. Supplier and customer contracts continue to run, and some contain clauses that react to a change in the controlling person.

Attention should also be paid to insurance, leases, licenses, and permits tied to specific individuals, and of course, tax and contribution deadlines, which do not cease upon death. The map of these dependencies is often more extensive than it first appears, and every overlooked item can turn into a penalty or a lost contract.

If you are dealing with the operation of a company after the death of a partner or executive director, it is wise to consult the situation before irreversible damage occurs – contact ARROWS law firm at consultations@arws.cz.

Options: What an Heir Can Do with the Share

Once the company's operations are stabilized, a strategic decision must be made. The heir of a business share generally chooses between three paths. None is universally correct – it depends on whether they want to and are able to run the business, what the relationships are with any co-owners, and what value the company has.

Continue the Business

The first option is to assume the role of a partner, and possibly also an executive director, and continue with the company. This makes sense where the heir has a connection to the industry, the company has a stable team, and the operations can be taken over without major disruptions. Even here, however, formalities must be handled – registering changes in the Commercial Register, setting up the statutory body, and often updating the articles of association to reflect the new arrangement.

Have the Participation Terminated or Accept a Settlement Share

An heir to an s.r.o. does not have to become a partner against their will. If they do not want to continue in the business, they can, within three months of the resolution on the acquisition of the inheritance becoming final, demand the termination of their participation in the company in court. This is a preclusive period – if it expires in vain, the right is extinguished and any later action is disregarded. This path cannot be used if they are the sole partner.

The second situation occurs when the articles of association exclude the transfer of the share to an heir. This creates a so-called released share – a share that has not passed to the heir and which the company continues to manage. In such a case, the heir does not acquire participation in the company, but a right to a settlement share, i.e., a monetary settlement usually derived from the company's equity or the real value of its assets. The company should first try to sell the released share.

This is a frequent source of conflict. The heir usually claims that the settlement share is too low; the company, on the other hand, defends the valuation from the financial statements. Without a quality expert opinion and contractual support, the dispute can easily move to court, and the settlement can be delayed for years.

Sell the Share

The third path is to sell the share to a third party or to existing partners. For many heirs, this is the cleanest solution, as it turns the company into cash without them having to take over its management. We will discuss this option in detail below – as it is also the one where it makes the most sense to pay attention to preparation.

Multiple Partners: When Continuation Becomes a Realistic Option

If the deceased had partners in the company, a layer is added that a layperson can easily overlook – the relationships between the partners. The articles of association or a shareholders' agreement often contain a pre-emptive right (the preferential right of other partners to buy the share), restrictions on the transferability of the share, or a condition of general meeting approval for a transfer to a third party. These arrangements can significantly complicate or completely condition the heirs' sale to an outside party, making it dependent on an offer to the existing partners.

It is in such an arrangement that the continuation by the heirs is often an interesting alternative. If an heir wants to and is able to build on the family business and the other partners agree, a smooth entry into the company can be arranged – including amending the articles, dividing roles, and setting rules for a future exit. This is particularly meaningful where the company has a stable team and the heir has the trust of the partners.

However, it is also true that a forced co-existence of a new heir with existing partners is often a source of long-term disputes. Well-established rules in advance determine whether the company will survive a generational transition or fall apart.

A Typical Example: Two Partners and a Sudden Death

Imagine a company with two equal partners, one of whom suddenly dies. Their 50% share passes into the estate and becomes the subject of probate proceedings involving the wife and two children. None of the heirs are in the business and have no interest in running the company. The other partner wants to keep the company running but is not sure who will be making decisions with them.

Until the inheritance is settled, the general meeting cannot reach a quorum without the involvement of the estate administrator, and routine decisions are stalled. After the proceedings end, the heirs have a choice: join the company as co-owners (and find a modus vivendi with the other partner), be bought out if a pre-emptive right or agreement allows it, or sell the share. Each path has different tax and value implications and a different risk of dispute.

This scenario shows why it is good to prepare a solution with an expert: the interpretation of contractual arrangements, the valuation of the share, and negotiations with the other partner will determine whether the heirs receive fair value and whether the company survives without a protracted conflict.

Selling the Company as the Cleanest Solution for the Bereaved

For many heirs, taking over management is unrealistic – they lack the time, expertise, or desire to run a company built by someone else. In such a situation, a sale is often the best solution. The bereaved convert the share into cash, the company gets an owner capable of continuing, and employees and business partners have certainty.

But selling a company is not just an advertisement and a single signature. At ARROWS law firm, Jakub Dohnal specializes in company sales. He can expertly find a buyer for the company, value the transaction, and manage the entire process to ensure the bereaved receive a fair price and do not take on hidden risks.

What the Sale Entails, Step by Step

A well-managed sale has its own logic and sequence. It begins with the valuation of the company and the preparation of documents based on which a realistic price can be estimated. This is followed by finding and approaching suitable interested parties and vetting them to avoid speculators or entities that will not complete the transaction.

When a buyer is at the table, due diligence follows – a legal, financial, and tax review of the company, during which the buyer examines risks and the seller documents the company's condition. The results are reflected in the purchase price and the text of the contract.

The share transfer agreement itself contains a number of protective elements: the seller's representations and warranties about the state of the company, provisions on liability for defects and debts, a mechanism for paying the purchase price (often using a lawyer's or bank's escrow), and possibly deferred payments tied to future results. For a company with multiple partners, it is also necessary to resolve pre-emptive rights and obtain necessary consents. Finally, there is the settlement among the heirs themselves and the registration of changes in the Commercial Register.

Each of these steps hides details that can cost the seller money – from poorly worded warranties for which they are then liable, to underestimating liability for the company's hidden debts. That is why it pays to have the process in the hands of an expert from the beginning, not just when a problem needs to be put out.

Tax Implications of Selling an Inherited Share

Attention must also be paid to taxes. The acquisition of an inheritance itself is exempt from income tax – inheritance tax was abolished in the Czech Republic. Tax implications typically arise only upon the subsequent sale of the inherited share.

When selling, a time test applies: generally five years for a share in an s.r.o., three years for stocks. If the test is met, the income from the sale is exempt under specified conditions. For inheritance in a direct line of kinship or from a spouse, the period during which the deceased held the share is also counted towards the test – which often helps heirs meet the test even if they themselves have held the share for a short time.

Furthermore, as of January 1, 2025, the consolidation package introduced an annual limit for exempt income from the sale of shares and securities. The exact scope and current amounts evolve over time, and because this is a sensitive topic with a major impact on net proceeds, it is advisable to have the specific transaction assessed by a tax expert before signing.

How to Prevent Risks During the Owner's Lifetime

The vast majority of complications can be prevented by succession planning. Although the topic uncomfortably touches on one's own mortality, for a company owner, it is one of the most important managerial tasks of all – it determines the fate of their assets, family, and dozens of employees.

During their lifetime, the owner can determine who will take over the company and how – by a will, an inheritance agreement (a bilateral agreement between the testator and the heir that provides more certainty than a unilateral will), or a legacy. They can appoint an executor of the will or an administrator of the estate to take care of the share during the proceedings. For larger assets and multi-generational arrangements, a trust fund, which separates the assets from the person of the owner, is an option.

Equally important is the setup within the company: clear rules in the articles of association about whether and under what conditions the share is inherited, supplementing the statutory body with a second executive director in case of an absence, and a shareholders' agreement addressing pre-emptive rights and exits. Insurance for a key person can also be considered, which would provide the company with a financial reserve to bridge a crisis period.

Succession Planning in Practice

A functional succession plan is not a single document, but an interconnected set of measures. It includes the clear designation of a successor and their preparation for the takeover, legal documents (will or inheritance agreement), corporate setup (articles of association, statutory body), and financial security (liquidity for buying out heirs who will not remain in the company).

The pitfall lies in the interconnectedness. A will that contradicts the articles of association can thwart the entire plan – for example, if the testator bequeaths the share to a person whom the articles of association exclude as an heir. Therefore, it is wise to prepare and mutually align the individual layers, ideally with experts who see all the connections at once.

A succession plan is a living document. It should be updated with every major change – a new partner, a divorce, the birth of children, the sale of part of the company, or a significant change in the company's value. A plan that is set once and left untouched for ten years is often worse than no plan at all, as it creates a false sense of security.

If you want to have your succession arranged before a crisis occurs, ARROWS law firm will prepare a complete plan for you – write to consultations@arws.cz.

Final Summary

The death of a company owner is an operational and legal stress test. Although the business share passes to the heirs, the interim period of probate proceedings can paralyze the company for months, especially if the sole executive director has also died. An heir does not have to become a partner against their will and can choose between continuation, settlement, and sale; with multiple partners, pre-emptive rights and consents also come into play. And selling the company, although often the cleanest solution for the bereaved, requires valuation, due diligence, and careful contractual and tax treatment.

For entrepreneurs, management, and investors, this means one thing: the decisions made at this moment have long-term financial and reputational impacts. Improvisation here is expensive – in the form of disputes, penalties, delays, and lost value. And most of these problems can be prevented by planning during the owner's lifetime.

If you do not want to risk mistakes, damages, delays, or unnecessary taxes, entrust the matter to experts. ARROWS law firm will guide the bereaved through the entire process – from securing the company's operations through probate proceedings to the sale of the share and finding a buyer. For clients' peace of mind, the firm is insured for professional liability with a limit of CZK 400,000,000.