We all protect what is important to us, it may be a simple life style change, gym membership to keep us healthy and/or insurances to pay the bills if we become ill, so why do so many of us choose not to protect our businesses? Here we explore why this is important and how this can work for you.
What is Shareholder Protection?
Shareholder protection is for directors of limited companies. Shareholders' protection is a contingency process detailing what will happen to a shareholder's shares if the shareholder dies or becomes seriously ill.
Why You Need Shareholder Protection
Take for example two directors, one owing 35% of the shares in the business with the other owning the remaining 65% of the shares: What would happen if one of them died? Without any protection, the surviving director would see the deceased’s shareholder’s shares forming part of the deceased’s estate, what happens now with the business, who gets the shares, why is the future so uncertain?
In this scenario, the beneficiary of the estate would inherit the shares and may decide that they wish to get involved in the business. This could work, however, if the beneficiary has little or no knowledge of the business and decides that they wish to make business decisions which differ from the other director’s views then conflict will arise and sadly we have seen businesses wound up for this very reason. However, it may be that this situation does not arise and that the beneficiary wishes to take no part in the business. What if the beneficiary still expects dividends, how long would the other director be prepared to do all the work and pay out dividends to someone not doing anything to drive the business?
Thankfully all this can be avoided with shareholder protection which is simply an agreement between the shareholders that if any of them dies then the surviving shareholder/shareholders can purchase the shares from his/her estate.
The simple solution is to purchase a life policy and write this into Trust to avoid an Inheritance Tax Bill on the proceeds – https://www.legalandgeneral.com/life-cover/microsites/businessprotection/business-protection-products/share-protection Here the surviving shareholders benefit from the policy proceeds which gives them the option to purchase the deceased’s shares and the deceased’s estate suffers no loss as money replaces the shares so the beneficiary of the deceased’s estate gets compensated.
Shareholder protection is so much wider in scope, as it can cater for what will happen if a director becomes ill and can no longer work - https://www.aegon.co.uk/advisers/protection/business-protection.html , how business decisions are to be made, who can be removed as a director and on what terms …. The list can go on.
Legal & General’s survey of firms unearthed that 39% of the survey expected their businesses to fold following on from the death of a shareholder - https://www.legalandgeneral.com/life-cover/microsites/businessprotection/trading-on-thin-ice.pdf All of the above is food for thought but there is so much more to think about so why not book an appointment today to talk over your business protection needs. We are here and want to help you.
Bennett Oakley Solicitors 01444 235232
Offices throughout Mid Sussex