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Sunday, June 5, 2011

Business Ownership Issues - part 2

A business partnership differs from a personal relationship/partnership in one important, fundamental way: It’s just business. You can prepare for a split in your business partnership with a lot less emotional upheaval than you might in a personal relationship.

The Articles of Association of most private companies include ‘pre-emption rights’, which provide that shares must first be offered to existing shareholders before they are sold to a third party. This will enable other shareholders to acquire shares from the personal representatives of a deceased shareholder.
More specifically, a separate Shareholders’ Agreement can set out the exact wishes of all shareholders with regard to matters such as the purchasers of any shares that become available; a formula for arriving at the purchase price; and how a purchase will be funded.
The purchase of shares or assets from a deceased shareholder or partner is very often funded by means of a life assurance policy taken out on the lives of all of the shareholders or partners concerned. Specialist advice should be obtained when taking out such a policy, as there can be inheritance tax or income tax ‘pre-owned assets’ implications where these policies are written in trust.
Loss of a key shareholder - in some businesses, the shareholders wish to retain control of the business, perhaps within a family. In these cases, agreements are commonly drawn up between the shareholders to ensure that control of the business is retained.
Should a business owner die, you have more issues to face than simply, “how do I replace him/her so that we can avoid a financial setback?” If the right provisions aren’t made, you could also find that the deceased owner’s spouse inherits the shares and becomes your co-owner, continuing to expect the same salary and profits from the business.
Company directors business partners shareholders and property owners should seek particular guidance on the impact of their death not only on their family but also on their business affairs. The failure to do so may jeopardise the continuing viability of the business after the death of the business client.
Rajiv Shah
Head – Life & Pensions
Earnest Insurance Brokers

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