Shareholder/Partnership Protection
If you have a partnership business or one with multiple business shareholders (e.g. a private Ltd Company), have you thought about what might happen if something happened to one of you?
This is where a Shareholder or Partnership Assurance Protection plan can help.
If a shareholder in your private Ltd company or partner in your partnership were to die or be diagnosed with a critical or terminal illness then their share would automatically go to their beneficiaries or next of kin.
This could have a hugely destabilising effect on your business, especially if the beneficiary or spouse wanted to sell their shares to someone else who did not align with your business values. Alternatively, if the other party wanted to play an active role when perhaps they did not understand the business’ needs and vision, the remaining shareholders would need to take this input onboard.
Why get Shareholder/Partnership Protection?
Shareholder or Partnership protection is a protective safety net that provides a lump sum that is automatically available to buy back shares from the deceased or terminally ill co-shareholder (where critical illness cover has also been incorporated into the policy). This helps the remaining shareholders to maintain control and minimise disruption at a challenging time as well as avoiding the unexpected need to find buy-out capital or dip into the company’s savings.
In addition to protecting the surviving shareholders, it provides clarity and transparency for the beneficiaries and a smoother transition of assets thereby helping both parties.
An example scenario…
Imagine a Ltd or partnership business which has 3 directors and is worth £300,000. The directors are not related and therefore it is not a family business. Each director owns one-third of the business equating to £100,000 each.
If one director were to die (or be diagnosed with a critical illness and could no longer work), then their shares would automatically go to their spouse or beneficiaries to manage or hold.
If the directors have set up Shareholder/Partnership life protection for each director then, when one is incapacitated or dies, the policy would payout for their share of the business. In this case, the business would receive £100,000 and would not need to find this large sum unexpectedly through savings or buy-out finance.
Instead, the business receives the money tax-free, and in a timely manner, and the money is directly used to buy out the deceased director. Such an arrangement with a cross option means the business can transition ownership much more smoothly and with much less stress as not only is the money automatically available, but the deceased director’s estate has to sell the shares to the remaining shareholders.
The business ownership would automatically transition to the remaining directors so each had 50% and they did not need to work around an additional business partner they didn’t choose and instead could maintain continuity.
Although an untimely exit from your business is not something any of us want to dwell on too long, you can see how ensuring you have Shareholder/Partnership life and critical illness protection can be beneficial to all and really help those who remain transition as smoothly as possible. Wouldn’t you want that for your business partners and family?
We consider each individual situation to determine the best benefits for you so contact us here at Downton & Ali to discuss how you can protect your business and your beneficiaries.
