Prepare for the unexpected and protect your company
The success of any company is often determined by the skills and efforts of key/essential individuals. Those efforts translate into a rewarding and successful business, so in essence the key individual and the business are inextricably linked.
What happens though, if something goes wrong? That is, what would happen to the business if anyKeyperson were to die or were diagnosed with a critical illness? Clearly the financial security of your company, your co-directors and families involved could be jeopardised.
The death or critical illness of a key person in your company could also threaten everything you have worked so hard to achieve.
This paper considers the impact that a critical illness, disabilityor death would have on the business directly and the individual’s family as a consequence and outlines some of the steps you could take to limit those effects.
- 1. Protecting the business
If you die or are diagnosed with a critical illness that results in you being unable to work, what would happen to your shares in the company?
If your family inherits your shares on your death, it might be impossible for them to take over your role in the company. Even if your co-directors, those who control and run the company,are prepared to buy your shares, they may not have the funds available to be able to buy your shares.
Typically for a company your family will have a number of options: –
- Take a share of the company’s profits, but this could amount to very little if the company is struggling because of your absence.
- Insist on winding up the company and receive a share of its value.
- Sell your shares to remaining co-directors.
- Sell the business in the open market– but this relies on finding a buyer who is prepared topay that price. This can be a potentiallylong and difficult process.
These options may not give you or your familythe full financial value of your shareholding. It may not give themthe security you might have wanted. However, with some forwardplanning you could create a much more attractive alternative.
One solution is for each director to take out life assurance and critical illness plans to cover their life, which are then put in trust for the other directors.
Then if you die or are diagnosed with one of the critical illnesses covered by a plan, the remaining directors will have the money to buy you or your family out of the company. This will also supplement any personal protection plans you have already made. This helps to ensure continuity and stability for the business and helps to provide financial security for your family.
- 2. Protecting your profits
It is most likely that not only would you provide the foundation of your company you are also likely to be make a vital contribution to its success.Therefore if you die, were diagnosed with a critical illnesses or were off work for an extended period due to illness or injury, then this could have a detrimental effect on your company’s ability to trade profitably now and in the future. The loss of a key person can cause far-reaching problems for a business such as: –
Loss of relationships– people like to deal with people they know and losing a key person can mean losing customers to your competitors and may lead to lower profits.
Loss of professional expertise– specialist skills and experience of your business can be difficult to replace and their loss could seriously affect your competitiveness.
Cost of recruitment– competitive job markets mean finding and training a replacement can be expensive and time-consuming. All of these issues could affect the profitability of your partnership – unless you’re financially prepared in advance.
One solution is for your company to take out life assurance and critical illness cover on the lives of its keypeople. This will help to compensate thecompany for any loss of profits, should akey person die or be diagnosed with acritical illness.
An income protection plan may also beestablished on the same basis. This will providethe business with a regular income if akey person is absent for an extended period due to illness or injury.
It is recommended that you take independent financial advice on these matters to ensure that you have considered the possible implications of losing a key person. It is also possible for the policies to be arranged quite tax-efficiently.
Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene (Incorporating Modiplus+). He can be contacted on 020 7383 3200 or firstname.lastname@example.org