Partnership protection is appropriate for businesses operating as a ‘partnership’ as defined by the 1890 Partnership Act.
Under this act, unless the partnership is set up to say otherwise, the partnership must be dissolved in the event of the death of a partner. The powers from the deceased partner transfer to their heirs.
This can lead to two difficulties:
Ensuring that the partnership can continue when a partner dies
That the surviving partners can retain control of the partnership.
These difficulties can be overcome through the creation of a Partnership Agreement which will state that the partnership doesn’t need to be dissolved and that the surviving partner(s) can purchase the deceased partners shares if they want to.
In addition to the partnership agreement there should be either a ‘buy and sell agreement’ or a ‘cross option agreement’ or an ‘automatic accrual method’ set up.
For any of those to work it is necessary for Life Insurance to be put in place to provide the funds for the surviving partner(s) to be able to purchase the partnership share, unless sufficient funds are already held.
Shareholder Protection is appropriate for small businesses operating as a private company where there are directors and shareholders.
It is similar to Partnership Protection, but without the requirement for the surviving shareholders to buy the deceased shareholders shares from their estate.
Problems which can arise are:
Possible financial issues for the deceased’s family where there is no ready market to sell the shares or where there are restrictions on the transferability of shares as detailed by the company’s Memorandum or Articles of Association.
The surviving shareholders can find themselves sharing the control of the business with the deceased’s heirs who may know nothing about their business.
As with partnership protection a life insurance plan would provide the funds for the surviving shareholders to purchase the shares from the deceased shareholders estate.
For both Partnership and Shareholder protection the type of life insurance plan and length of term will vary.
Our advisers at Tom French and Associates will be able to help you with both of these types of protection, engaging with the relevant legal professionals where required and in ensuring that you secure the correct life insurance for your needs.