Whether you’re a seasoned business owner or you’ve recently set up a new company, you’ll have no doubt put a lot of energy and capital into making it a success. Unfortunately none of us can predict the future and shareholder protection is one of the best ways to protect your company and minimise the risk of your hard work going to waste. In the event of unexpected illness or death of a shareholder, protection can make all the difference to your business survival.

What is Shareholder Protection?

Shareholder Protection is a type of business insurance that pays out a lump sum when a shareholder is diagnosed with a critical or terminal illness and declared unfit to work or when they pass away. In such an event, this type of protection acts as a succession plan for your business with a binding agreement to provide shareholders with the funds needed to buy shares back from the ill or deceased co-shareholder.

This protects both the business and the shareholders where the surviving business owners can repurchase the shares from the deceased party’s family in order to keep them within the company. In turn, the insured person’s beneficiaries will benefit from financial support via the monetary value of the shares.

This meets a two-fold need – the owners’ beneficiaries inherit shares but may have a more urgent need for the capital and may not receive the full value should they choose to sell on the open market. In addition, it supports the surviving shareholders who might want to purchase the shares but might not have sufficient, or readily available, funds with which to do so. This is especially pertinent for small businesses who would otherwise need to try and raise buy-out capital at short notice.

What are the risks of not having protection?

One of the best ways to understand the value of shareholder protection is to look at things from the other side of the coin; what could happen if you choose not to put protection in place? If shares are passed automatically to the deceased’s next of kin, business owners risk losing control over the running of the business. These beneficiaries could become involved in major business decisions without the essential knowledge or skills.

It also means risking major disruption to business continuity, operations and reputation at a time when you are already struggling with the untimely death of your co-business owner. Dealing with ownership can be a hefty burden at the best of times and having a set plan in place avoids any unnecessary upset, confusion or conflict. With protection in place, you also avoid the risk of shares being sold to competitors.

Should I get Shareholder Protection with Critical Illness Cover?

This is one of the most commonly asked questions and the answer will depend on the size of your business, premium costs and other key factors that are best discussed with a professional. While most policies are life insurance-based, critical illness cover is a popular add-on to extend your protection. Research shows that people are more likely to be diagnosed with a critical illness than to die suddenly, so this could well be a worthwhile investment.

Setting up Shareholder Protection

The shareholder arrangement will set out how the shares should be valued. It gives the surviving shareholders the right to buy the shares, or the outgoing shareholder the right to sell. When it comes to the type of cover available, there are three main ways to set things up.

The first is via the ‘life of another’ policy which is most typically employed when there are only two shareholders. Both take out a life insurance policy with the other as the beneficiary, and any pay-outs are tax exempt. If this route is chosen, then the individuals will pay the policy premiums.

When there are more than two shareholders, a common route to take is each shareholder setting up own life policies under business trust whereby the death of a shareholder will see their equity shared among the remaining shareholders. Taking out a company shares purchase agreement is another popular option but tax implications usually mean this is only suitable for businesses aged five years and over. When the company pays the policy premiums, they can be declared as a business expense.

Taking Crucial Steps

There are many different questions to answer when it comes to finding the right policy costs, which is why sitting down with a qualified financial planner is essential. For advice on any aspect of shareholder protection, give us a call on 020 8371 5232  or email info@vintagecorporate.co.uk.

Our expert guidance will prove crucial to ensure that your policy is arranged correctly and that the valuation of the business is accurate. We can also discuss related protection that may be helpful for your business and complement your existing arrangements, such as partnership protection, relevant life insurance and key person protection.