Failure to plan properly could have dire consequences for the family business or business where you are a shareholder/director, partner, LLP member or a sole trader.
Unfortunate outcomes
These are some of the consequences of not having a ‘corporate will’, or the right agreements, in place:
· business share and assets pass to a family member who is not in the business or cannot work in it (and is not wanted as a business partner);
· shares pass to a family member instead of cash (holding shares does not guarantee that a dividend will be paid);
· if a sole trader, the estate of the deceased is liable for business debts, including redundancy claims of employees – this could extend to some partnerships;
· possible solvency issues on the death of a key person could destroy the business or result in a ‘fire sale’, with no value for spouse and family;
· end of business continuity and uncertainty could lose employees and contracts at a vital time for the business;
· aggravation between remaining business partners and deceased’s family who require ongoing cash to survive;
· personal guarantees and other liabilities could be called in; or
· without proper planning and protections, the family could lose their house and savings and suffer from financial stress at a time of bereavement.
The need for a succession plan
There is therefore a great need for a ‘corporate will’ for every business. This outlines succession planning, and how to cope with catastrophic business events or individual circumstances occurring, such as death or disability. The business can map out what happens next and how it will be achieved.
Apart from the essential business planning with regard to business continuity, it is also important that these joint principles be matched in individual wills and business agreements. Whilst the company’s Articles of Association can give the default option of automatic transfer of shares to a spouse, selling shares, and share valuation, it is not necessarily accurate and share valuations could be complicated.
Requirements for corporate succession planning
· properly structured individual wills;
· valid business agreements (such as ‘cross option’ as opposed to ‘buy and sell’ agreements – the latter are not inheritance tax (IHT) efficient);
· share valuation mechanism (updated regularly);
· business insurance to cover loss of assets, business interruption, employer and employee liability cover, health and safety cover, loss of profits due to catastrophe etc.;
· life and disability cover (as well as critical illness cover) to cover key person and individual shareholder agreement cover – providing cash to cover the loss of a key person to the business and the means to buy shares off the deceased estate;
· succession plan – who will succeed to the business in the event of retirement or death?;
· if employees and management are to succeed, consider employee ownership. New tax rules from 6 April 2014 enable individuals to sell their company to an ‘employee ownership trust’ without having to pay capital gains tax if certain conditions are satisfied;
· prepare the business for sale from day one. That will keep everyone focused on an efficient business with growth and value potential;
· retain inheritance tax business property relief (BPR) through the use of trusts. If the company is sold after the business owner’s death, then the funds pass into trust instead of to the spouse, who can therefore avoid a 40% IHT bill on death – and it can be possible for the surviving spouse to have access to the funds during her lifetime.
Proper planning essential
Whilst there is no such single item as a ‘corporate will’, the business can arrange its affairs in such a way that succession planning and business continuity continues on the death or retirement of a business owner and indeed, a key person. Proper planning is therefore essential, and the inclusion of risk prevention leads to a reduction of poor outcomes.
Practical Tip:
Conduct a ‘corporate will’ audit on your business, ensuring that agreements are in place and aligned with individual wills. Prevent financial loss through adequate business and personal insurance. Plan now if employees are part of your succession planning strategy.
