Behind every liberal practice, there is a person, a face, an energy that drives and sustains the business. However, no one is immune to the uncertainties of life. When a liberal professional faces a long-term illness or passes away, the structure of the business can falter or even collapse. Understanding the main consequences of such events and anticipating them becomes a matter of survival for the business, its partners, and its employees who depend on it.
Me Valérie BOUCHEZ and Me Marie LALANNE, partner lawyers at LIBRATO AVOCATS, provide an overview of this crucial yet often overlooked topic at the start of a business.
I. Long-term illness or death of a partner: what are the major risks ?
The long-term illness or death of a liberal professional leads to legal, financial, and organizational consequences for the liberal practice.
A. Legal consequences.
The legal consequences may differ depending on the event and the way the liberal practice is structured.
Sole Proprietor : In the case of long-term illness or death, the activity of the sole proprietor ceases unless a replacement or substitute is designated (by the professional, their order, or the court). Their role will be to ensure the minimum continuity of the practice and the follow-up of clients/patients.
It should be noted that death causes the merging of personal and professional assets (Article L526-22 of the French Commercial Code), exposing the entire estate to creditors, with heightened risks if the entrepreneur is married under the legal community regime and has incurred significant debts in the course of their professional activity (Articles L526-22 et seq. of the Commercial Code, resulting from the Law of 14 February 2022).
Exercising in a company : The incapacitation of a partner due to long-term illness can be managed internally, between the partners, so that they take over the care of the ill partner’s clients or patients. Naturally, if the partner was practicing alone, without other partners, the same consequences in terms of replacement or substitution as for a sole proprietor will apply, until the partner is able to resume their activity.
If the incapacitated partner holds a corporate mandate, the situation will differ depending on whether there are other partners in the company and whether they already hold a corporate mandate.
In the case of multiple legal representatives, the company can continue to be managed by the other corporate officers.
But what happens if the ill partner is the sole legal representative?
In this case, the statutes should provide for the procedure for designating a new manager from among the other partners.
Article 1846 of the French Civil Code states that “if, for any reason, the company is without a manager, any partner may convene the partners or, failing that, request the president of the court to appoint a representative to do so, solely for the purpose of appointing one or more managers.“
It should be noted that the specific provisions for each regulated profession set out, in the absence of statutory provisions, the procedures for designating a substitute corporate officer.
What about the dissolution of the company ?
Unless otherwise provided by the specific decree for each profession or, in the absence of such provisions, by the statutes, a company with multiple partners is not dissolved by the death of a partner.
However, in the case of the death of the sole partner, the company may be dissolved, unless the successors, practising the same activity as the deceased partner, are approved. In that case, they would be responsible for acquiring the shares from the deceased’s heirs.
Transfer of shares. It is important to note that the Ordinance of 8 February 2023 and the implementing decrees for each profession, some of which date from 14 August 2024, govern the rights and obligations of the heirs of the deceased partner who held company shares.
For example, Article 27 of the Ordinance of 8 February 2023 states, regarding professional civil companies (SCPs), that “in the event of death, the heirs of the deceased partner do not acquire the status of a partner. However, they have the option,” within one year as set by the decree, “to transfer the deceased partner’s shares, subject to the approval of the remaining partners.” The heirs may also, if they regularly practise the profession corresponding to the company’s corporate purpose, request to be approved as partners.
Article 47 of the same ordinance provides that the heirs of a partner in an SCP may hold the company’s shares for a period of five years following the death of the partner, after which they are required to transfer the shares, unless they have been approved as practicing partners, provided they practise the profession that constitutes the company’s corporate purpose.
B. Financial consequences.
The long-term illness or death of a partner can lead to the following financial consequences:
• In the case of long-term illness of a sole proprietor, the professional directly suffers from the loss of revenue and profits due to the suspension of their activity. It is therefore essential for them to consider subscribing to supplementary health insurance to maintain their income during their sick leave (cf. II -b.1).
• The sole partner of a company may face the same consequences as the sole proprietor. However, it should be noted that in the case of a company subject to corporate taxation (IS), reserves built up before the sick leave can provide the partner with continued income through dividend distributions.
• In the case of multiple partners, the maintenance of the incapacitated partner’s compensation depends on the partnership agreement. There is no legal or regulatory obligation for the remaining partners to maintain the incapacitated partner’s compensation. It thus becomes essential to clearly define the relationships between partners in the articles of association, internal regulations, or partnership agreement, particularly concerning the solidarity they wish to uphold (cf. article II-a).
Regardless of the situation, subscribing to insurance contracts is important (cf. II b.1).
• In the event of the death of a sole proprietor, the tax consequences of cessation of activity apply. Article 202 of the General Tax Code states that “income tax due on the profits derived from the exercise of this profession, including those arising from debts acquired and not yet recovered, and not yet taxed, shall be immediately assessed. It is calculated at the last rate used for calculating the advance payment mentioned in 2° of Article 204 A.”
Taxpayers must, within sixty days as indicated below, inform the administration of the cessation and notify it of the date when it was or will be effective, along with, if applicable, the name, surname, and address of the successor.”
• In the event of the death of a partner in a company, there are no tax consequences for the company due to the death of a partner. However, if there is a sole partner, the tax consequences depend on the fate of the company. If the company is taken over and continues its activity, no tax consequences related to the cessation of activity will be borne by the company itself. However, in the case of dissolution, the heirs may face certain tax consequences, depending on the company’s structure and whether there is a liquidation surplus.
• It is important to highlight the specific rules in companies subject to income tax (IR), notably professional civil companies, where the profit is often distributed among the partners in proportion to their shareholding in the company. In the event of the death of one of them, the heirs have the right to receive the equivalent value of the shares. However, in the meantime, they also have the right, according to consistent case law, to receive the proportional share of the profit rights based on the capital ownership (1). The case law has allowed partners to have “the freedom to enter into agreements that deviate from this rule to determine their financial relations when one of them withdraws (2),” but it must be noted that the withdrawing partner must have agreed to such an arrangement before their withdrawal, which also applies to the deceased partner.
(1) Cass. 16 April 2015, No. 13-24.931
(2) Cass. 8 January 2020, No. 17-13.863
II. Securing the Future : Anticipation Strategies
Anticipating these situations means protecting the future and sustainability of the liberal practice. Beyond the importance of internal communication on these various topics, it is possible to organize them legally and also “through insurance.”
A. Legal and Organizational Provisions
No mandatory rule obliges the partners of a company to foresee and organize the legal and financial consequences in the event of illness or death of the liberal professional. However, given the consequences mentioned above, anticipating these situations helps secure the future.
Anticipation starts with discussing these issues together and ensuring that everyone shares a common view, in order to later implement a new legal and financial organization.
The statutes can include specific clauses such as:
• The continuity clause for the company in the event of the death of a partner, preventing automatic dissolution.
• The approval clauses regarding the buyout of the deceased partner’s shares or the obligation for the company to buy back the shares from the deceased partner. These clauses must be drafted carefully to avoid creating deadlock situations. The approval clauses may specifically provide that the heirs (who do not possess the required professional qualifications) cannot request to become partners in the company. In this case, they will only be financially compensated based on the agreed-upon value of the deceased partner’s shares. The approval clauses can also be supplemented in the partnership agreement to ensure that third parties are not aware of the rules regarding the fate of the deceased partner’s shares.
• The valuation of shares to anticipate conflicts at the time of the company’s share valuation. The valuation may also be included solely in the partnership agreement for confidentiality reasons.
Extra-statutory documents, such as the partnership agreement, the internal regulations, or the remuneration agreement, must be drafted carefully to anticipate situations where a liberal partner becomes incapacitated.
Thus, it is possible to foresee:
• A right of first refusal by the remaining partners to purchase the shares of the deceased or incapacitated partner who can no longer practice.
On this point, discussions often arise when drafting the partnership agreement or internal regulations. At what point is it considered that a sick partner can no longer practice their profession permanently and must therefore transfer their shares? These are real issues that often lead to important discussions between partners.
• The valuation of shares as detailed above.
• A clear operational framework in the event of the death or illness of the liberal professional. This may include provisions for their replacement in the case of prolonged incapacity.
The remuneration agreement helps secure the income of the incapacitated liberal professional. Thus, it is possible to provide for:
• Continuation of their remuneration for a predefined period and amount.
• Income for the remaining active partners in the event of the incapacitation of one of the partners.
In these three contractual documents — the partnership agreement, the internal regulations, and the remuneration agreement – it is important to include the insurance provisions. However, these must be put in place beforehand.
b. Financial and insurance security
Subscribing to an insurance policy represents a long-term solution to financially protect the business in the event of illness or death of a leader or partner in a liberal practice.
To mitigate the impact of the disappearance or unavailability of a liberal professional, many optional insurance options have emerged to address the risks of illness or death.
Here are some essential, but optional, insurances :
1. Health insurance in the event of illness, accident, hospitalization, or disability
In the case of illness, accident, or hospitalization, a liberal professional may find themselves without income, as the daily allowances from their mandatory system are often insufficient, depending on the profession and the affiliation system. A health insurance policy can help compensate for this loss by providing daily allowances to cover personal and professional expenses.
Similarly, if partial or total disability prevents the continuation of the professional activity, the health insurance provides a pension to maintain a decent standard of living and mitigate the financial impact of the inability to work.
2. Key person insurance
Key person insurance for a liberal professional is a policy subscribed to by the liberal practice to protect the business against the financial consequences of the absence or loss of the professional considered essential to the activity. This insurance aims to ensure the continuity of the practice in the event of death, temporary work incapacity, disability, or total and irreversible loss of autonomy of the key professional.
3. General expenses insurance
In the case of extended work stoppage, a liberal professional must continue to bear fixed costs: office/firm premises rent, professional loan repayments, salaries, etc. A good insurance policy can include coverage for these various expenses.
4. Cross insurance
Cross insurance between liberal partners is an essential arrangement to maintain harmony and control over the structure in the event of a partner’s death. It works by providing a capital payment to the surviving partners to buy back the deceased partner’s shares, thus preventing the imposition of a new partner by the heirs or by paying capital directly to the designated beneficiary liberal practice, allowing the heirs to be compensated through capital reduction.
The designation of beneficiaries must be made with precision to ensure the effectiveness of the arrangement.
In conclusion: Anticipating is securing your future !
Sick leave or the death of a liberal professional are not pleasant topics, but they must be anticipated to avoid major difficulties. Between statutory provisions, partnership agreements, internal regulations, and insurance solutions, numerous options exist to secure the future of the company, its partners, and its employees. Don’t let chance decide for you !
Anticipating is securing your future !
We can implement solutions tailored to your situation.