Shareholder Protection: Keep control of your business
Shareholder Protection: If one of your shareholders dies or is suffering from a severe illness, their shares will usually pass to their beneficiaries. To regain full control of the business, the surviving shareholders will need to buy the shares back. But they might not have the available capital to do this.
What is a shareholder/partnership?
Shareholder and Partner Protection provides a business with a cash lump sum if a business owner dies or suffers a severe illness. This lump sum provides the capital to enable the surviving business owners to purchase the deceased’s or incapacitated individual’s share of the business – allowing them to keep control of their business.
Who are Shareholder Protection and Partner Protection designed for?
Where all the owners of the business are members of the same family then there is usually no problem with succession when one of the owners dies or becomes incapacitated. However, in businesses run by unconnected parties (or families where succession is not assured), the death or incapacity of an owner is likely to cause serious disruption to the business and problems for both the business and family of the owner concerned. This can apply equally to partnerships, LLP’s or limited companies.
Why is Shareholder and Partner Protection needed?
If a business owner dies or suffers a severe illness, their share of the business will usually pass to their beneficiaries. To regain full control of the business, the surviving business owners will need to buy the deceased’s or incapacitated individual’s share of the business. Many businesses will not have the available capital to do this and so Shareholder and Partner protection provides the framework where the right money is left in the right hands, at the right time.
Common Pitfalls and the Need to Review
We encourage all companies to review their shareholder protection arrangements. There are a number of reasons for doing so;
- In our experience 8 out of 10 businesses do not have a scheme, or one that is fit for purpose.
- Often arrangements are put in place and not reviewed.
- Shareholders come and go, and percentage holdings change as well as business values
- Shareholder agreements conflict with the company Articles of Association
- Inappropriate levels of cover are used, and for the incorrect terms
- Trusts are not always set up correctly
- Cross option agreements are not put in place
The arrangements should provide the required amount of money, at the right time, and in the right hands.
Even if the arrangements in place are ‘fit for purpose’, in recent years the premiums for life cover have reduced and therefore equivalent cover can often be provided at a lower cost.
Our advice to businesses is to review their arrangements on a regular basis.
We carry out a review at our cost, so you really have nothing to lose and everything to gain by getting in touch.
If you think your business could benefit from either setting up a shareholder protection scheme, or reviewing your current one, to speak with one of our independent financial advisers then give our Hove office a call on 01273 208813 or email [email protected]
This article was originally published on Friday, May 13, 2016 – 13:16
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IEP Financial is authorised and regulated by The Financial Conduct Authority (FCA)
