For some the pandemic has offered them the opportunity of becoming self-employed, even forming partnerships or limited companies. But when businesses are formed of more than one partner/shareholder, it is important to understand the implications.
Matters such as voting rights, income and strategy are all exciting topics and important ones to confirm. These are all often dealt with within the articles of association and memorandum of a business. However, what is less exciting but nonetheless important is what happens to the shares of a business in the not so good times. For the purposes of this article, I will look at shareholder protection, but the principle for partners is the same.
Imagine, you are in business with your friend/colleague/ family member. You both own 50% shares. Business is booming and the value of your business is growing year on year. You both have “big plans for the future” and at the present time both enjoy a good level of income from the business.
Then one week at work, your fellow business partner does not turn into work one morning. You receive the phone call that sadly confirms they have passed away. After the initial sadness and grief, your thoughts turn to the business.
- What is going to happen to his/her shareholding?
- How will the business manage day to day?
- You assume your shareholders spouse/partner will inherit the shares, but what then? She/He has no interest in your business and has never worked there.
- Will you need extra staff to continue the role he/she were fulfilling? Will you have to continue to pay the deceased spouse a dividend?
All these questions lead to the unknown and will take time to organise. You could offer to buy the shares from the spouse, but the business is making decent profits and paying out decent dividends, why would she sell?
Would the spouse prefer the cash proceeds? Can you afford to borrow the money to pay her out?
All of these questions could be resolved by some forward thinking and planning. No-one likes to talk about death, but I am afraid for all of us it is one of two things certain; death and taxes. It’s important to plan for the future.
Before you are potentially faced with these issues, it is possible to jointly effect a shareholder agreement. This is effectively a will for your business and stipulates what happens to the shares in the event of death and/or a serious illness. Coupled with a life policy to reflect the value of the business, this can provide a relief for both parties, to provide the right funds to the right people at the right time.
Looking at insurance is all about risk and effect. Some things may never even happen, but if they did, the risk to your business is colossal. That is where insurance comes in. Everyone insures their business for theft and fire amongst other things, however, people often do not regard the main asset of one’s business are the people within it.
For example, the shares of your business partner would pass to their spouse. At the same time, you, the remaining shareholder, would receive the proceeds of the life insurance policy. You then have the option of buying the shares from the deceased spouse. She/he also has the option to sell them to you. If either of you exercise your option, it then becomes binding on the other party to agree.
Equally, in this event, you may also need to recruit someone else, that is where key employee cover would come in and is something we will cover in a future blog.
If you are in business with someone else, please make sure that you have given this consideration and have a plan. If you want us to review your plan or your business financial needs, please do get in touch. We’re here to talk about shareholder protection, future planning and more.
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