Your business is something you take great pride in. So, understandably, you want to protect it from bad luck, unfortunate accidents, and unexpected setbacks.

Many entrepreneurs do this by taking out insurance to cover their business premises and equipment. However, considering the consequences of something happening to a key member of your team could also secure the future of your business.

In our three-part series, you can read about some of the different types of business protection in more detail.

You previously read about the benefits of relevant life cover and how it can support your family and your employees if the worst happens.

In part two, read on to find out more about shareholder protection, and how it can help minimise disruption to your firm if one of your business partners is seriously ill or passes away.

Could your business survive if a shareholder passed away?

You may have great plans for the future of your business or a clear idea of your exit strategy. But, what would you do if an unexpected event got in the way of your plans?

For example, there is a possibility that you or one of your business partners might become seriously ill or pass away before you’re able to reach your goals.

Imagine a scenario where a business partner passed away, leaving their shares to their family. Would you want another family member involved in important company decisions? If not, would the family sell the shares to you? And how would you afford to buy them?

If you don’t have a plan in place, a shareholder’s equity may pass to their next of kin who may have no interest in the future of the business and who could decide to sell the shares to a third party.

Shareholder protection can help you overcome some of these issues and minimise the disruption the unexpected death of a co-owner might have on your firm.

Peace of mind that you can buy your co-owner’s shares

Shareholder protection ensures your business can continue without interruption if a co-owner dies or suffers a serious illness.

It provides a lump sum to enable the business, or remaining shareholders, to purchase the shares at a fair price. It also gives the deceased’s family peace of mind that they will receive an agreed sum for the shares.

You benefit as you won’t need to take out loans or liquidate business assets to be able to find funds quickly to purchase the shares.

The insured sum is usually equivalent to the value of shares and is paid out as a lump sum upon death or the diagnosis of a serious illness.

It’s a valuable type of protection that you should consider if:

 

  • Your business has a small number of key shareholders
  • You want to ensure your operations are not disrupted
  • You want to retain some control over the ownership of your company
  • You would not be able to immediately buy a co-owner’s shares in the event of their serious illness or death.

 

Without this cover, you risk losing control of a proportion, or even all, of your business.

There is also a risk that the beneficiary may want to become involved with the business and that their priorities are not the same as yours. Alternatively, they may decide to sell the shares to a competitor.

The cost of shareholder protection varies depending on factors such as the:

 

  • Age, health, and lifestyle status of the individual shareholders
  • Amount of cover
  • Policy term.

 

Adding a payout in the event of a serious illness may also increase your premium.

Helpfully, if your business is responsible for paying shareholder protection premiums, these premiums can be tax-deductible. Note that HMRC may see them as a taxable benefit-in-kind for your shareholders.

An example of how shareholder protection can ensure the stability of a business

Claire, Himesh, and Rachel are each 33.3% shareholders in a successful manufacturing business.

Rachel, one of the founding shareholders, unexpectedly passes away prematurely. Her shares pass to her family, who do not have any interest in becoming involved with the company.

Fortunately, the co-owners had put shareholder protection in place. Their policy had a sum assured equal to the value of their respective shares, payable on death.

Upon Rachel’s death, Claire and Himesh received a payout that they used to purchase Rachel’s shares from her estate.

Claire and Himesh continued to run their company without disruption, and Rachel’s family received the financial compensation they were entitled to without having to become involved in the day-to-day operations of the business.

Get in touch

If you’d like to explore how putting the right business protection in place could protect you and your team, please get in touch.

Email hello@cordinerwealth.co.uk or call 0113 262 1242.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning or trusts.

Note that financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.

Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.