Business partnership protection
As a small business owner you will be aware that the long-term success of your business depends on contribution from both yourself and your partner/s.
A serious illness, permanent disablement or even death of a partner can have a serious impact, both on the future of your business itself and on your/their family. To preserve the continuity of the business it is vital that the remaining partner/s are fully prepared for such an eventuality.
A financial planner will tell you that one of the great risks of a business partnership is that your partner/s share of the business passes to someone else. That person may have little interest in the business or – at worst – may be hostile to your objectives. Equally a partner who suffers a serious illness may want to retain the option of continuing in the business or be compensated for their exit from the business.
Business partnership protection allows your business to help protect itself against the financial loss it may suffer from losing a partner or have enough funds to buy out the interest in the business, or compensate the deceased’s dependants.
Most remaining partners will want to buy the missing partner’s share to keep control of the business. They may already have some form of agreement in place to allow the business to carry on after the loss of a partner. But they may not have access to funds to allow this to happen.
Realistically, few partners will have the funds available so some will turn to their bankers, but this could be a problem if:
- they have existing loans that rule out further advances; or
- the bank’s uncertainty over the future stability of the partnership may mean that banks will be less likely to make a further loan
Business partnership protection is normally set up by:
- Taking out a life insurance policy for each partner to the value of their share of the partnership
- Placing these life insurance policies in trust so that any payout is available to the remaining partners without any tax implication
- Setting-up a Cross Option Agreement between the partners so that if the options are exercised, the holder of the share must sell them and the other partners must buy them
If there is no partnership agreement in place that specifies that the partnership should continue on the death of a partner then in England and Wales, on the death of a partner, the partnership is automatically dissolved. (Partnership Act 1890).
Due to the different types of plan and the tax implications involved in this type of financial planning, seek advice from an independent financial adviser.
Any questions on business partnership protection?
If you have any questions, please do not hesitate to contact us. Call us on 01582 839280 or Email us.
