Shareholder Agreement & Partnership Agreements

Understanding the Risks

The death or incapacity of a Director or Partner due to sickness may have a wide-ranging impact. What happens to their stake in the business is usually an immediate concern. In the absence of an agreement, the share of the deceased or sick partner may end up in the hands of family members or beneficiaries with minimal interest, experience or capability to continue contributing to the business. This may cause uncertainty, impair business continuity and even cause conflicts among surviving partners or shareholders.

In addition, the economic cost can be devastating. The remaining Directors or Partners can find themselves in such a situation that they are obliged to purchase the departing member share to retain control and stability. Nevertheless, it may be difficult to raise the required funds in the absence of proper financial arrangements. This may push the business into borrowing, asset sale or even the business may have to deal with the possibility of an unwanted third party getting into the business.

The Importance of Shareholder and Partnership Agreements

Every business that has multiple owners should have a properly written shareholder or partnership agreement. Under such agreements, the fate of each party share upon occurrence of death, critical illness, and other major events is outlined. They are clear and certain, and they prevent disputes, as well as, ensure that the parties are aware of their rights and duties.

However, most businesses either lack these agreements entirely or have documents that are outdated or inadequate. Even when agreements exist, they often fail to address how the necessary funds will be raised to execute the terms of the agreement, such as buying out a deceased partner’s share.

Implementing the Right Protection Products

The application of the appropriate protection products is the lacking ingredient in most of the businesses. They are financial products that are meant to offer the required finance in case of death of one of the partners or a long-term sickness. The most popular types of protection are life insurance and critical illness cover, which is arranged in a business-oriented way.

To illustrate, a life insurance policy may be arranged whereby upon the death of a Director, a lump sum is paid to the business or to the surviving partners. This sum can then be used to purchase the deceased portion in his or her estate which means that the surviving partners maintain ownership of the business and the business operations are not disrupted. Likewise, critical illness cover may release finances in the event that a partner is diagnosed with a critical illness which renders them unable to work and the business can cope with the change without having to struggle financially.

Why Businesses Overlook Corporate Protection

There are several reasons why Directors and Partners neglect these critical issues. Often, there is a lack of awareness about the risks and the solutions available. Many assume that such scenarios are unlikely to happen to them or that their business is too small to warrant formal agreements and protection policies. Others may be put off by the perceived complexity or cost of arranging these protections.

Nevertheless, the costs of not acting can be much higher. Family quarrels, compulsory sales and economic struggle are all very feasible outcomes of businesses not preparing for the worst. Directors and Partners may proactively protect their business, their families and secure the future of their enterprise by actively taking steps to put in place shareholder or partnership agreements and the appropriate protection products.

Summary

Corporate protection is not just for large corporations; it is a vital consideration for any business with more than one owner. Directors and Partners must take the time to assess the financial implications of death or long-term illness and put in place robust agreements and protection products. By doing so, they can secure the future of their business and provide peace of mind for themselves and their loved ones.

Protect Your Business with Shareholder Agreements That Works

Corporate protection isn’t just for big companies, it’s essential for any business with more than one owner. At Howard Wright, we help Directors and Partners put robust shareholder agreements and protection policies in place to safeguard the future of their business in the event of death or serious illness.

Make sure your business is protected, your financial risks are managed, and your loved ones have peace of mind. Call us on 0345 688 4939, complete our Smart Enquiry Form, to get expert advice tailored to your business.

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