Protecting your Business
Shareholder protection insurance
Many SMEs are formed by more than one person; they’re either a partnership, a limited liability partnership (LLP) or a company with shareholders. That means other people have a stake in the business and with them comes a risk – what would happen if one of them died or suffered a terminal or critical illness and couldn’t work? Ideally, you would want the business to continue – but would that be possible?
Without some form of legally binding succession planning, it’s possible that any shares held by your co-owner would be inherited by their family or other beneficiary – and they may not have the interest, the time or the skills to make the business a success. In fact, given their sudden loss and change in circumstance, they may choose to sell the shares they inherit. Would you be able to buy them? If you couldn’t, where would that leave you?
It’s important to have a legal agreement setting out what would happen if one of your co-owners died (or suffered a critical illness) and this could be set out in the partnership agreement, company’s articles of association or as a separate agreement. Ideally, it would give the surviving shareholders the right to buy any shareholding from the beneficiaries and for the beneficiaries to sell the shares to the surviving shareholders.
Although the agreement would ‘set the scene’ and allow you to buy the shares, it doesn’t provide the means of you being able to do so – and that’s why ‘shareholder protection insurance’ is a good idea.
Shareholder protection insurance combines a legal agreement setting out how the shareholding will be managed in the event of the death of a shareholder, with suitable insurance policies on the lives of each individual shareholder. In the event of a co-owner dying, the remaining owner or owners receive a lump-sum payout allowing them to buy the shares and retain control of the business. To cover most situations, shareholder protection insurance can be written in three forms:
- ‘Life of another’ policy
This is used when a business has just two shareholders. Both apply for a policy on the life of their business partner, the policy representing the value of the shares each partner holds (which may not be equal). Should one of the shareholders die, the surviving shareholder becomes sole owner of the business.
- ‘Own life’ policy
Individual shareholders take out their own policy, equal to the value of the shareholding they hold, and this is held under trust. If a shareholder dies, the other shareholders use the policy payout to purchase the shares which are then equally distributed amongst them.
- Company share purchase
The company takes out policies against all the shareholders, the individual policies covering the value of each shareholder’s stake. If one of the shareholders dies, the company receives a payout which allows it to buy the deceased shareholder’s shares. Setting up a company share purchase scheme can be a complex process.
It’s also important to note that your co-owner’s dependants and beneficiaries also benefit from your business having shareholder protection insurance as, in the event of your co-owner’s death, a robust mechanism is in place that safeguards their financial interest.
Although shareholder protection insurance won’t compensate for the loss of a friend and valued member of the business, it may help you keep your business and secure its future.
How can One Financial Solutions help you?
Life is full of risks. As a firm of independent financial advisers we can provide you with impartial advice to help you identify the potential risks that you and your business may face.
We’ll work with you to plan an appropriate protection strategy, recommend the best products from across the whole of the financial services’ market, help implement the protective safeguards you need and provide a periodic review. It’s all about ‘risk management’; knowing the risks you face means you can protect your interest in your business.
So, if you’re looking for help with any aspect of protecting your business, please call us on 020 3714 9565 or ask us to call you by sending an email to email@example.com.