Share and Partnership Protection
Shareholder Protection
If a business owner dies or is diagnosed with a critical or terminal illness, their share of the business usually passes to their beneficiaries, which means the control of that share does too. The other business owners may want to buy that share but many businesses don’t have the money to do this and it can be costly to borrow.
Shareholder protection allows business owners to buy shares back from a co-shareholder who is diagnosed with a critical or terminal illness, or dies. This policy helps surviving owners stay in control and minimises disruption to the business.
Why Shareholder Protection matters
Dealing with ownership in a company can be difficult in the event of death or illness.
A shareholder arrangement sets out how the shares should be valued and gives the surviving shareholders the right to buy the shares, or the outgoing shareholder the right to sell.
Setting up Shareholder Protection
Each individual shareholder can take out separate cover for themselves (known as an ‘own life’ policy). This insures them for a sum assured equivalent to the value of their company shares. If they choose to, they can write this into trust to benefit their co-shareholders.
You may need your shareholding clients to enter into an explicit agreement that if one of them dies, the remaining shareholders can buy their shares from their personal representatives.
They can also agree that if one of them suffers a critical illness, the affected shareholder can choose to sell their share. If they decide to do this, the remaining shareholders must buy it.
These are called double and single option agreements.
Any policies you set up must be aligned with the Articles of Association and the shareholders’ agreement. There may also need to be a trust and/or buyback document in place, for them to be effective.
Partnership Protection
Partnership protection guards businesses against losing control of the partnership in the event of a partner being diagnosed with a critical illness, terminal illness or if they die. A life or critical illness policy will provide funds to buy the interest in the partnership from the affected partner or their estate.
Partnerships and limited liability partnerships
There are two types – traditional partnerships and limited liability partnerships (LLP). A LLP will continue following the death of a member but profits will be paid to the deceased’s estate. If there is no Partnership Agreement for a traditional partnership, it will dissolve on death and the deceased partner’s estate and beneficiaries will be entitled to their share of the business.
Why Partnership Protection is needed
If a business partner dies or wants to leave when they are diagnosed with a critical or terminal illness, the remaining partners may want to buy their interest in the business and keep control. But only a few will have the financial resources to do so.
Taking out partnership protection insurance gives surviving partners the financial support they need, helping them keep the business running and retain control in difficult times.
Setting up Partnership Protection Insurance
In a standard partnership, each partner takes out a life or life and critical illness policy and writes it into trust for the benefit of the other partner(s). If there are just two partners, they can each set up a personal life of another policy.
The individual partners pay the premiums – you can adjust these to reflect each partner’s share in the business.
Although the partnership may have a name and a bank account, the business cannot own property or insurance policies in its own name. In the case of a LLP, which is recognised as a legal entity, the business (rather than individual partners) can own the policy.