Protecting your share

Protecting your share

When you are setting up a business, there are so many things to think about, not least how you are going to support yourself until profits start to flow. It is a highly stressful, if enjoyable time, looking forward to the opportunities which your ideas are opening up.

The last thing on your mind will be your health – and more particularly that of your partners.

It may be considered rather morbid to think about at the time but, if you were to lose the contributions of a key partner to ill health, or worse, the impact on the workings of a small business, could be enormous. Not only would you lose the companionship of a business partner and friend but you also lose their valuable expertise and you could potentially lose a share of your company to spouses or beneficiaries who are interested in its value but have little or no interest in your vision for its future.

The answer therefore, for every entrepreneur, is to think seriously about setting up some level of shareholder or partnership protection. Such an arrangement will safeguard you against these pitfalls by enabling the existing company directors to purchase business shares from a fellow director’s family in the event that they die or suffer a critical illness which prevents them working. It is available to individuals in either a limited company or a partnership and, combined with a good shareholder agreement, can help ensure that you and your partners retain control of your firm should the worst happen.

There are a number of ways to go about taking out the insurance. Each principal could take out a policy on each of the others, a popular approach when there are just two partners involved in a business. However, this can get complicated for three or more partners and can also seem unfair if the age difference between partners is significant as the cost of insurance for the older age will be much higher. For three or more partners, therefore, the more common approach is for each to write a policy on their own life and then place it in trust for the benefit of the company itself.

The remaining shareholders can then use the funds received by the company to purchase those shares and redistribute them amongst themselves.

For more help and advice please contact us at Hoskin Financial Planning

Until next time Paul Hoskin, Hoskin Financial Planning.

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