Graham Smithson, Employee Benefits Consultant (Cardiff and Bristol)
Hanover Financial Management Ltd
Hanover is a member of The Ince Group.
Setting up a business is an exciting time, and while looking ahead to the opportunities that are opening up, perhaps the last thing on most entrepreneurs’ mind is the death or severely diminished health of either themselves or one of their business partners.
If you were to lose the contributions of a key business partner to ill health or worse, the impact on the workings of your business could be enormous. Not only would you lose the companionship of a business partner, and possibly a friend, you would also lose their valuable expertise. Moreover, you could lose a share of your company to the spouses or beneficiaries of their estate, who may only be interested in the fiscal release-value of their inherited shares, and have little or no concern about the business’ future.
What are some of the steps you can take?
The answer is to seriously consider setting up some level of shareholder or partnership protection. This could help to safeguard you by enabling existing partners or company directors to purchase business shares from a deceased’s family if they should die or suffer a critical illness which prevents them from working.
This protection is available to individuals in either a limited company, LLP or a partnership. When combined with good shareholder and ‘cross option’ agreements, it can help to ensure continuity by providing insurance funds that you and surviving business partners could use to retain control of your firm should the worst happen.
What are the available options for shareholder or partnership protection?
There are a number of ways you can take out these types of insurance. Each principal of the company could take out a policy on each of the others; this is a popular approach when there are just two partners involved in a business. However, matters can become more complicated when there are three or more partners involved.
There can also be inequitable situations if the age differences between the business partners are significant, because the cost of insurance for older people will be much higher.
Therefore, for three or more partners, it is a common approach for each business partner to establish a policy on their life and place it in trust for the benefit – in appropriate shares – to the other business partners/ directors. If the worst should happen, the remaining shareholders can then use the funds received from the insurance cover, to fund the purchase of the deceased’s shares from their family or estate, and to redistribute them amongst the surviving business partners according to the Trust and ‘Cross Option’ Agreements.
A third route for larger and long-established businesses is to consider a company share purchase agreement. This will require the company to take out life insurance policies on all of its directors (on the basis that the business is the owner of the cover). In the event of a claim, the business then receives the proceeds upon one of their deaths. The company then buys the shares from the beneficiaries with the policy proceeds, and cancels them – with the remaining shareholders owning a proportionately increased value of the business.
Is it worth purchasing protection for business partners or shareholders?
The costs of protection can be relatively low for life cover only, and for business people, it is as important as arranging a personal Will and Lasting Powers of Attorney. These issues are equally important for established businesses, as well as new ones. We frequently find that no regular reviews have been undertaken on the business protection arrangements, despite the fact that circumstances and the value of the business may have changed significantly, and any existing cover may not be sufficient. It is also important to make sure the planning for these arrangements is conducted in conjunction with your accountants and business lawyers, and we help to ensure this is the case.
The information in this article is provided for guidance purposes only and does not constitute financial or legal advice.
For more details on this important area of business governance, please contact our specialists at Hanover: Graham Smithson on 07867 453030, or Richard Brazier on 07917 390344.