The only things certain in this life are death and taxes
When do we think about the unthinkable? And no, I’m not talking about your most recent VAT bill or the lump of Corporation Tax you need to pay in a few months.
Over half of small businesses have not thought about ‘the unthinkable’ and more than 1 in 10 business owners estimated their company would cease trading immediately following a death or critical illness of a key individual within the business. This is particularly concerning for small businesses, who are often reliant on one or two people to produce income and keep the business operational.
And in the case of bereavement or serious illness, family and dependents will be grieving or perhaps caring for the business owner and so worrying about how the business will continue to function without them, how to deal with shares or how they can maintain some income can be particularly stressful at an already difficult time.
Preparation, preparation, preparation
No one likes to consider their own mortality but, just as you’d plan thoroughly for your retirement, it pays to be prepared and ensure you have sufficient cover in place, should the unthinkable happen. Having a plan in place and communicating this with your nearest and dearest (and your business partners, if you have them) will help all involved.
Where your business has more than one shareholder i.e. a partnership or similar, it is important to discuss with your fellow shareholders what your intentions are in the event of your death (and what their intentions are, of course). You should have a written agreement in place which should be regularly reviewed as the business develops.
Make a will
Advisable for everyone, not just business owners, a will ensures your estate is dealt with in the way you want it to be after your death. As your shares in your business form part of your estate, you can stipulate in your will who will take ownership of these. For sole business owners, this is an effective way to ensure shares are dealt with smoothly. But for any businesses with multiple shareholders, ensure any provision in your will is in line with the Shareholders Agreement – it’s advisable to consult with your business partner(s) prior to drafting your will.
Consider carefully as well what future you want for the company – if you want the business to move forward and continue trading despite your death, are you leaving your shares to someone who can facilitate this? Will they have the skills and experience to continue running the business? Will any existing shareholders be happy to work with them?
Or, if it is simply a matter of ensuring the business can be closed easily, what financial provisions are in place to replace the income source?
Whilst you will likely have a life insurance policy in place, does this provide enough cover to provide for the loss of income for your family if your business can’t continue to trade without you? And what about if you are seriously ill and cannot work in the business or a prolonged period – do you have insurance to cover that too?
There are some specific insurances available for businesses to give them an element of protection, should the owner or a key individual pass away. You may want to consider a key man insurance policy, which is a life insurance policy held by the company for any key individuals, with the business as the beneficiary of the policy. The company can use the insurance proceeds for expenses until it can find a replacement person, or, if necessary, pay off debts, distribute money to investors, pay severance to employees and close the business down in an orderly manner.
Alternatively, a buy-sell policy works in a similar way, but pays the benefits to the co-owners of the company so that they can effectively pay that money to the family members of the deceased, as way of payment for their interest in the business.
Firstly, think about it! Take advice from your accountant or an IFA if you need further guidance or want to discuss your options. Get your plan in place then review regularly, as yours and your businesses needs will change over time.
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