Protecting your Business
Frequently used terms
An individual or group who shares ownership of a business with other individuals or groups. Although each co-owner owns part of the business, the proportion being expressed on a percentage basis, it may not be shared equally. The legal relationship between the co-owners is defined by the type of business entity, eg: a partnership or limited company, the co-owners’ individual rights being defined in a written contract or agreement.
An association of people formed for the purpose of a carrying out a business undertaking. The association has a legal personality separate from that of its members; liability is usually limited, the two principal forms of ‘company’ being private limited liability (‘Ltd’) and public limited liability (‘PLC’). Although companies are owned by their members (shareholders) they are managed by a board of directors
Company share purchase
A method of shareholder protection whereby the company itself, rather than the surviving shareholders, buy the shares owned by a deceased shareholder. This takes place under a contract agreed between the company and its shareholders and results in the company buying the shares ‘off-market’, ie: not via the Stock Exchange. At one time, a company buying its own shares was prohibited; although it’s now possible it’s a legally technical and complex subject.
Critical illness (insurance)
An insurance product that pays a tax-free cash lump sum in the event the person insured is diagnosed with one of a number of predetermined illnesses. Although the schedule of illnesses varies between insurances companies, it’s usual for critical illness’ policies to be very specific about which illnesses qualify and their severity.
Director’s loan (account)
A director’s loan is money received by a director of a company that isn’t salary, dividend or expense repayment, or the repayment of money paid to or loaned to the company. Although most loans are ‘planned’, there are circumstances that can unwittingly lead to the creation of a director’s loan, eg: leaving a dividend in the company; borrowing more from the company than has been loaned to it or buying things for the company and not reclaiming the expense. Loans cause the creation of a director’s loan account and must be recorded on the company’s balance sheet.
Independent financial adviser (IFA)
The term has a specific meaning: a financial adviser who offers independent advice about financial matters and recommends suitable products from the whole of the market. IFAs are regulated by the Financial Conduct Authority (‘FCA’) and must meet strict competence and qualification requirements.
Key person protection (insurance)
An insurance policy taken out by a business to protect itself against any financial loss it may suffer in the event of the death or terminal / critical illness of a named individual considered indispensable, ie: a ‘key person’. The policy covers ‘financial loss’, it does not cover the inability to repay debt; this is covered by loan protection insurance. A business may need both key person insurance and loan insurance to fully safeguard itself for the loss of a key person.
An insurance product that pays a one-off, lump sum or makes regular payments to a named beneficiary in the event of the death of the person insured (although it may include cover for either terminal or critical illnesses). Although life assurance is usually associated with providing compensation / income for a dependant, it is also used to provide protection to cover a specific risk, eg: repaying a loan in the event of the death of the person liable for the loan (see loan insurance).
‘Life of another’ policy
A shareholder insurance policy generally used when the business is owned by just two shareholders, usually in a partnership. Each shareholder takes out a life assurance policy on the life of their partner; its value equalling the value of their partner’s shareholding. If a shareholder dies, the surviving shareholder receives the pay-out and can use it to buy their partner’s shareholding.
Limited liability partnership (LLP)
A legal entity formed under the Limited Liability Partnership Act 2000. An LLP can be formed by two or more individuals and enjoys the benefits of having limited liability, as would a limited company, but with the flexibility of a partnership. Although an LLP is liable for the full extent of its debts, the liability of its members is limited.
Loan protection insurance
An insurance policy taken out by a business to help repay any outstanding loans in the event of the death or terminal / critical illness of a key person. A life / life and critical illness policy is taken out for the person(s) liable for a specific loan; in the event of their death the loan can be repaid. The policy can be assigned to the loan’s lender; the lender receiving the pay-out direct from the insurance company. Loan protection insurance often supplements key person protection insurance.
‘Own life’ policy
Individual shareholders arrange life insurance policies; the value of each policy equalling the value of the shareholder’s shares, the policies being held under a business trust. If a shareholder dies, the remaining shareholders use the pay-out to buy the shares owned by the deceased shareholder, the shares purchased being divided equally amongst them.
Any person, company or entity that owns at least one share of a company’s total share issue is a shareholder: shareholders are a company’s owners. Unlike sole traders and the owners of partnerships, corporate shareholders are not personally liable for the company’s debts and other obligations and, although they do have a say in how the company is managed, they don’t play a major role in doing so.
Shareholder protection insurance
A combination of legal agreements and insurance policies used to enact succession planning in the event of the death of a shareholder. The legal agreements set out what happens; the insurance policies provide the finance necessary to buy the deceased shareholder’s shares.
SME (Small and medium-sized enterprise)
A globally-accepted abbreviation for a small business – although its definition varies from country to country. In the UK, a company is defined as being an SME if it meets two out of the following three criteria: 1) a turnover less than £25m, 2) less than 250 employees, 3) gross assets of less than £12.5m. It’s estimated that (at the start of 2014) 99.3% of UK private sector businesses were SMEs, their £1.6 trillion annual turnover accounting for 47% of private sector turnover.
A person who does business without formally creating a business organisation. It is not a legal entity as, apart from a couple of exceptions, no legal formalities are required to create the business. Both the business assets and the personal assets of the sole trader are subject to claims from the sole trader’s creditors.
This is usually considered to be the process of identifying and developing employees who have the potential to fill key business leadership positions in the company as the need arises. It is also an exercise used to address ‘what if’ scenarios – in this case, what if ‘x’ dies, what happens, who takes over the business and how does it happen?
A disease or medical condition that cannot be cured or adequately treated and that is reasonably expected to result in the death of the patient within a short period of time. The term is more commonly used for progressive diseases such as cancer or advanced heart disease than for trauma.
A ‘trust’ is a relationship created by an individual (the ‘settlor’), in which another party (the ‘trustee’) holds the individual’s property for the benefit of others (the ‘beneficiaries’). The trustee is given legal title to the property but has to act for the good of the beneficiaries, the trust being governed by the terms under which it was created (the ‘deed’). There are many reasons for creating a trust and, consequently, many different types of trust.
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 firstname.lastname@example.org.