Entrepreneurs are being warned to consider preparing a company Will in order to safeguard the future of their business.
Kathryn Harwood, head of Wills & Estate Planning at regional law firm Napthens, warns that many entrepreneurs are too busy building a business to stop to think about what could happen if they were to pass away.
A typical scenario could see business partners who have worked well together for a number of years, growing a business between them – shares for the business are held equally between them.
Kathryn pointed out that even in a situation where business affairs appear straightforward, there can be plenty of unanswered questions which may cause issues if a business partner died.
She explained: “A common situation can see a surviving business owner find themselves in partnership with the family of their former business partner who now own half the shares and are involved in decision-making.
“A very useful solution to issues like this is a company Will, which is actually not a single document but a three-stage process.
“First of all, the shareholders enter into a shareholder agreement, under the terms of which, if one of them dies, the survivor has the option to purchase the shares.
“The executor of the deceased’s estate can also require a surviving shareholder to purchase the shares from them. The price will be based on a formula agreed between the shareholders.
“Next, the shareholders take out life insurance written in favour of the other, and paid for by the company, to provide funding for the share purchase.
“Finally, each shareholder makes a personal Will in favour of their chosen beneficiaries, and often directing shares into a discretionary trust – otherwise the proceeds of a sale can be liable for inheritance tax at 40 per cent on the death of an individual beneficiary
“This vital process will ensure a deceased shareholder’s family receives fair value for their stake in the business, and enable the survivor to continue unencumbered by outside influences.”