Tony Granger looks at what can happen to a business that has not protected itself, nor prepared itself for the death of a key person, member of staff or a shareholder.
In the same way that an individual can preserve assets and direct them through having a will, so can a business. If an individual died intestate, there may be different results that occur (e.g. the wrong people inheriting, assets not held in trust to protect them from divorce or inheritance taxes, delays in achieving payment or probate, etc.), and similar results may occur for businesses.
The ‘business will’ is made up of a number of business agreements and protection policies and trusts that dictate what happens in the event of a death, retirement, or when a catastrophe may occur. This can happen to any business and includes sole traders, partnerships, limited liability partnerships (LLPs) and companies. Trading trusts and charities can also be included.
If the proper agreements and protections are not in place, the business could go into insolvency, owe creditors money, lose tax reliefs, pay fines, incur additional taxes and lose tax reliefs.
Sole traders
The business will is similar to the individual’s will. If the sole trader had employees, they have a claim for redundancy and wages against his estate on death, payable before his heirs can inherit. There is a big need here for life assurance in trust to cover employee redundancy and other business costs, such as rent, tax, VAT and business costs. It may pay the sole trader to enter into an agreement with another sole trader or small business to purchase his business on his death or disability, and to cover the post-death sale with life assurance.
Tip:
Consider covering the business expenditures through a life policy written in trust.
Partnerships
Partners’ business affairs are governed by their partnership agreement. If something is not specified in it, it defaults to the Partnership Act 1890. A few of the clauses dealt with by the Act relate to joint and several liability and responsibility by the surviving partners for the business debts and liabilities of the deceased partner, amongst others. Under the Act, the heirs of a deceased partner have an immediate call for cash for the deceased partner’s share. Sometimes the partnership agreement does not state how partnership shares will pass on death. If so, the share of the deceased partner accrues automatically to the surviving partners.
Companies and LLPs
The memorandum and articles of association are the two governing documents required for UK company formation in the UK under the Companies Act 2006 and previous Companies Acts. The memorandum of association is the document that sets up the company and the articles of association set out how the company is run, governed and owned. Whilst these documents can be helpful, additional agreements are required to determine the succession planning of the business in the event of death or serious disability. The agreement can also deal with retirement issues and the sale of shares, and payment of them.
Tip:
Have a cross option or double option partner or shareholder share agreement to dictate how the partnership or company shares will pass and how it will be paid for, and when. Inheritance tax (IHT) business property relief should apply, in which case there should be no IHT payable. A properly structured partner/shareholders’ agreement is like a will for the business.
Tip:
Life assurance should be in business trusts. Save on key person cover not being taxable in the company by writing it with the shareholder protection in trust.
Practical Tip:
Business protection is an essential factor for every business:
- protect personal guarantees and renegotiate bank debt;
- directors’ and officers’ insurance protects the directors and key personnel when the business is threatened with legal action;
- companies can insure the shareholders to buy back its own shares;
- protect business assets, employees, shareholders and their families; and
- have a succession plan with goals and update it regularly.
