Private limited companies and partnerships are usually owned by a small group of individuals. Often little consideration is given to what happens to an individual’s share of the business should they become seriously ill or die. It can be the case that even if businesses have thought about such an event, they have wrongly assumed a particular outcome and are therefore unprepared for the result when the time comes.


Shareholder And Partnership Protection

The issues that need to be considered vary slightly for limited companies and partnerships because they are different types of legal entity.

Limited Companies

Commonly we find that most owners believe that their shares pass automatically to their fellow shareholders within the terms of the company’s memorandum and articles of association. This is NOT normally the situation. Instead, the surviving individuals typically only have the first right to purchase the shareholding of a deceased shareholder, but that doesn’t mean they have either the means or the desire to buy the shares.

Partnerships

If your partnership does not have a formal partnership agreement in place, then on the death of a partner, the partnership would automatically be dissolved in accordance with the Partnership Act 1890.

It is essential that all partnerships check that a suitable agreement is in place because otherwise your business could disappear before your eyes!

Most partners believe that the business would pass automatically to their fellow partners on their death but this is not necessarily correct.

Irrespective of the legal status the presumption that a share passes to your fellow owners poses many problems, including:

  • How would they fund such a purchase?
  • What is the value of the share that is being bought / sold?
  • What are the tax implications of arranging such a transaction?
  • If the remaining owners do not want or cannot afford to buy the shares, what are the implications?

If it is not possible to arrange such an exchange of shares then there are often many adverse consequences:

  • Often a business owner has devoted their working lifetime to the business, which ultimately they perceive is for the benefit of their spouse and family, should they die. However, if there is no mechanism for selling that share, how will that individual’s family cope financially?
  • If the share cannot be sold, the remaining owners will inherit a new owner who could be the spouse or children of the original shareholder! But, do these individuals have experience of running a business? What is their level of expertise? How do the remaining owners get on with them? How will their involvement affect the future value and profitability of the business?

Suitable arrangements need to be put into place to ensure that funds would be available to enable the surviving shareholder / partners to buy back the deceased owner’s share from their family at a fair price. This needs to be coupled with a suitable legal agreement to ensure that all monies are passed across in a tax efficient manner and that there is a mechanism to ensure that such a transfer does take place if either the seller or purchaser requires it.

Similar issues may arise in the event of the serious illness of a shareholder or partner and such issues need to be considered for that eventuality as well.

This is a very complex but vitally important area of financial planning and there are many tax pitfalls that could impact on the arrangements made. Making a mistake in this area could be very costly for both the business and the family who has lost a loved one.

If you are worried about what will happen to your business’s shares in the event of illness or death, we would encourage you to contact us at AEON. We have many years of experience which will help you to make sure you have as comprehensive financial security as you can reasonably afford to suit the needs of your business.