The importance of Business Protection is often overlooked. Business owners will often focus on building profits. However, life has a habit of throwing a curve ball now and again. Key employees with vital skills can get ill and require time away to recuperate, shareholders can die unexpectedly, leaving the company in turmoil. Not only can this affect profitability, but it can also lead to an undesirable change in the ownership of the company.
Business Protection is available for partnerships (including limited liability partnerships), shareholders, sole traders, and key employees. Having a robust plan in place for your business, just as you would write a will for your personal affairs, can help ensure the long-term financial health of your business during difficult circumstances.
What are the main types of Business Protection?
Key Person Protection
Key people are individuals whose skills, knowledge, experience, or leadership are important to the continued financial success of your business. Whether your business is a Partnership, Limited Liability Partnership, Company or even a Sole Trader, it is likely to have an individual, or individuals who are crucial to its continued activities and prosperity.
Most businesses will have taken out insurance to cover buildings, contents, vehicles, and their employees for accidents in the workplace. However, few businesses have any insurance to cover the one eventuality that can literally mean the end of their business and the income it provides upon the death or illness of a Key Person.
By establishing a protection policy on the lives of the Key People within your business you will be ensuring that cash is available at a critical point in time to allow the business to continue trading. There are no set rules regarding the amount of cover as this will be unique to your business, but it would typically include the recruitment costs of replacing an employee, loss of profits or the repayment of a substantial business loan.
We can help you identify the key personnel in your business and quantify the financial assistance your business may need to financially support you through this critical time.
We work with you to put cover in place to meet your specific business needs and can help you to ensure your cover remains adequate as your business grows.
Many of us have a Will to ensure that if the worst happens there is a clear record of our wishes regarding our financial and other material assets.
Fewer people realise it is equally important to leave clear and concise instructions of your wishes if you should die or have a serious illness whilst running a business. In the event of the death or serious illness of a business owner, concerns will be raised by family members and business partners alike.
Your family may ask
- Do I want to inherit a share in the business?
- Will I be forced to work in the business, like it or not?
- Who can I sell the business share to?
- What price will they be willing to pay and will that be sufficient to give me financial security?
Your business partners may ask
- Who will inherit the business share?
- Will they want to work in the business, whether I like it or not?
- How can ensure that I would have sufficient cash to buy the shareholding?
- What price will I need to pay?
In most businesses the remaining shareholders or partners will want to retain control of the business and the family members, as beneficiaries, will usually want to receive the full cash value in exchange for their inherited share of the business.
To ensure the best outcome for your business and your beneficiaries, it is prudent to put a ‘Business Will’ in place. This is a legally binding agreement which outlines the why’s and how’s of what will happen to your share of the business in the event of death or serious illness and this will consist of 3 elements:
- An agreement as to how the transfer of the business share will take place
- A mechanism to provide the money to allow the share to be bought
- A way in which the transfer can be arranged in a tax efficient manner
By setting up an agreement in advance the owners of a business can be sure that the surviving shareholders/partners retain control of the business, the family receive a payment of ‘fair value’ for their share in a tax efficient manner and the family are not forced to join the business or the business to accept them as owners.
Working alongside your accountant and solicitor, we can help you create a ‘Business Will’ that meets the specific needs of your business and ensures that everyone gets what they want. We will then continue to work with you to review your arrangements to ensure they remain suitable as your business grows.
Relevant Life Plan
A Relevant Life Policy is a tax- efficient alternative to a ‘death in service’ benefit that allows you to pay your key employees’ family a cash lump sum if they die while employed by your company.
They are more commonly used for employees or directors of a limited company. There are however some exclusions including sole traders or equity partners where they are taxed under Schedule D.
They can be suitable for smaller businesses that do not have enough members for a group scheme but still want to offer excellent employer benefits, high earners who do not want their group death in service benefits included in their lifetime allowance or employers looking to top up their benefits that they receive from their employer’s scheme.
The policy is taken out and paid for by the company and to be tax efficient for both employer and employee, the policy must be placed in trust.
The way forward
How the arrangements are set up will depend on the structure of your business and particular requirements. We will conduct a thorough risk assessment of your business including identifying the key people in your business and how their absence may affect profitability, details of any outstanding loans, plus understanding the structure of your business. We will then provide you with an indicative cost to put your plan in place to ensure it fits within your budget before providing you with a more bespoke report.
For help in planning and implementing your ‘Business Will’ or any other aspect of Business Protection please contact one of our regional representatives.
Contacting Menzies Wealth Management
Menzies Wealth Management offices:
7-12 Tavistock Square
Telephone: +44 (0)20 7465 1980