The loss of a partner, member or shareholder can have a major impact on the success of a business in terms of ensuring continued control for the remaining owners.
Companies, Limited Liability Partnerships and Partnerships
Under an individual purchase arrangement, each business owner takes out a protection plan on their own life for the value of their share of the business. The plans are written into trust for the benefit of the other shareholders, members or partners.
In the event of the death or critical illness of one of the business owners, the others will receive the proceeds of the plan from the trust to enable them to fund the purchase the shares of the deceased or critically ill business owner.
Alternatively, if there are only two or three owners it is possible for each owner to take out plans on each other’s lives so that in the event of one of the owners dying or suffering a critical illness, the proceeds of the plan will be payable to the surviving business owners.
In both cases it is recommended that a cross-option agreement is made between the business owners in order to regulate the sale and purchase of the share of the business.
A cross option agreement provides that on death or critical illness of a business owner, the deceased’s personal representatives have the option to sell the deceased business owner’s share of the business and the surviving business owners have the option to buy it thereby ensuring the continuing viability of the business.
Company share purchase
The rules are strict but it is possible for a company to purchase the shares of a deceased or critically ill shareholder. In this situation, the Company would take out a plan on the life of the shareholder so that in the event of their death or critical illness, the proceeds of the plan would be payable to the company enabling it to purchase the shares of the deceased or critically ill shareholder.
For exactly the same reasons stated above, a cross option agreement should be made between the Company and the shareholder to ensure the continuing viability of the business.
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Information provided in this article is not intended to constitute professional advice and you should take full and comprehensive legal, accountancy or financial advice as appropriate on your individual circumstances by a fully qualified Solicitor, Accountant or Financial Advisor/Mortgage Broker before you embark on any course of action.