15th January 2020
For most of us, death is probably the hardest thing to talk about, acknowledge or confront, but it will happen and ignoring it could have serious implications if your company is not correctly structured. As we start another New Year, this may now be the time to look at the way your company is structured and make sure you have a plan in place should the worst happen.
Many owner managed businesses have a single director who is the sole shareholder with no other officers (directors or company secretary). These are often businesses that incorporated back in the early 2000’s and if this was prior to 1 October 2008, they will have been formed under the old Companies Act 1985 and therefore, in all likelihood, will have Table A Articles of Association.
The potential problem with this is that if the business owner dies, the company is left with no living officer or shareholder and with no one to operate the company, its assets (in most cases the bank account or accounts) will be frozen. This will mean employees and suppliers cannot be paid, contracts cannot be entered into and the company will quickly cease to trade.
Being able to appoint a director to carry on the business either long-term or until a suitable purchaser has been found is vital therefore to ensure the assets of the company are protected for any beneficiary of the deceased’s estate.
The company can appoint a second director or issues shares to a second shareholder, but if this is not possible or desirable, the company can either adopt the Articles of Association in the Companies Act 2006, or it can amend its Table A Articles of Association by adopt the provisions of Article 17 of the Companies Act 2006. This specifically states the following,
“In any case where, as a result of death, the company has no shareholders and no directors, the personal representatives of the last shareholder to have died have the right, by notice in writing, to appoint a person to be a director”.
It is also important to consider this if the company has a married couple who are the only directors and shareholders because if they were to die at the same time, the situation would be the same as for a single owner managed company.
However, the above situation is not the only thing that needs considering. Where you have a number of shareholder and directors, for example when a group of friends have set up a company together and one of them dies, what will happen to their share of the business?
In this situation, it is a good idea to have a shareholders’ agreement, which not only covers what will happen in this scenario (the other shareholders have the right to purchase the shares of the deceased at market value for instance) but also will cover other areas such as remuneration levels, departing shareholders, disagreements and selling the business. It can be a powerful tool that provides clear guidance as well as providing peace of mind.
Key person insurance. Key person cover is designed to help protect the business in the event of death or critical illness of the business owner or a key employee. If the business owner or key employee dies or becomes seriously ill, the policy pays out a lump sum to the company to make up for any loss in revenue or profits.
Shareholders cover. This can provide the business with a cash lump sum if one of the owners dies or suffers a severe illness. It is designed to help the remaining shareholders minimise disruption to the business by providing capital that enables them to buy that shareholder’s shares and so keep control of the company.
Business loan protection. This is an insurance policy to provide a lump sum to cover any outstanding business debts if a business owner dies or becomes seriously ill. In this event the remaining business owners may need to repay any outstanding business loans, some of which may have personal guarantees or have to be repaid when someone dies.
Devon small business owners work hard most of their lives to build up the value of their business. Careful planning on a suitable business structure and having the right business protection strategies in place now, will ensure that the business preserves that value and can continue to be run for the benefit of employees and family in the event of the worst happening.
If you would like to meet to discuss the business planning services which we are able to provide, please contact our team on 01392 258553 or 01395 279521 to find out more or arrange a free initial meeting.
Our sister company, Thompson Jenner Financial Services can help you with residential and business mortgages, income protection, investments and savings, planning for retirement, pensions and estate planning.
