A partnership or company structure is a great way of pooling resources and skills to the financial advantage of all concerned. However it also brings its own responsibilities and possible financial burden if a partner retires, dies or is incapacitated.

For any director or entrepreneur, his shareholding in the business is likely to be his greatest financial asset and so he needs to take steps to protect it, not only for the benefit of his family, but also for the benefit and continuation of the company and any other business partners.

Business continuation plans, based on a suitable legal arrangement, can provide a simple and tax-efficient way to protect the family and the company.

The suitability of any Shareholder Protection Plan should be assessed with reference of the following criteria.

• Money must be in the right hands – those who need the cash must have it available at the right time
• Equitability – the cost of providing the capital should be distributed fairly amongst the partners
• Flexibility – the plan must be sufficiently flexible to take into account future changes to the constitution of the business
• Tax efficient – the plan should be designed to minimise potential taxation

There are 3 main areas that shareholders and organisations should look to protect themselves.

Death

When a partner or shareholder in a business dies, the deceased’s share of the business will normally form part of his estate for the benefit of the family and possibly be subject to estate tax. The family then has 2 alternatives.

1. A member of the family could take over the deceased’s position or appoint someone to act on their behalf
2. Realise the value of the shares by selling them

Both of these options can present serious problems for the family and the business. Does the family member, often the wife of a deceased shareholder want or have the necessary experience to help run the business? Are the funds available for the business to buy the shares for the family?

A carefully written Share Protection Plan will ensure that on the death of a partner a lump sum will be available immediately to the remaining partners, enabling them to buy back the shares from the family, remain in control and ensure continuation of the business.

Retirement

When a partner wishes to retire from the business, he will need a retirement income. If this income is to be provided from the sale of his shares then he and the remaining partners will face many of the problems that would occur on death of a partner as detailed above.

Some partners will want to retain some involvement in the business even after they have retired, so many choose to leave some or their entire share in the business or encash in stages over a number of years. This scenario is likely in a family-run business or where the retiring partner is making way to another family member.

Careful planning will ensure that either the funds are available to buy the retiring directors shares on retirement or sufficient retirement provision is put in place by any director who retires and leaves shares in the business.

Disability

Not only do businesses have to plan for a partner’s retirement or death, they also should consider what would happen if a partner becomes disabled or cannot work.

The long term disability of a partner in a business can lead to serious financial problems for the business and the partner’s concerned. The partner would no longer be contributing to the daily running of the business, but will often still be reliant on the business for income.

There are many low cost insurance products available that can mitigate this risk to a family and business.

Summary

Through careful planning and regular reviews with qualified advisers companies can easily mitigate much overlooked threats to family and business in a cost effective manner.