Running a business is very time-consuming and rewarding. So much so that it can be easy to not stop and think about what would happen to it if you were removed from it.
Death, illness and incapacity can hit a business owner at any moment, often leaving the company drifting and struggling in the water. Certainly, this is true for sole traders since the business owner in this situation typically is the business.
When a sole trader dies, their assets are typically included within their personal estate – added to the value of their house and personal possessions. This can massively increase your inheritance tax if you are not careful, leaving your beneficiaries struggling to cover the bill.
Yet the death or incapacity of a business director can also hit partnerships and limited liability companies very hard as well if there is no solid contingency planning in place.
In this article, we’re going to cover some important ways you can “future-proof” your business by ensuring there are adequate measures in place for your business if either you – or another key person – suddenly find themselves unable to take the helm for an extended period of time.
As mentioned above, when a sole trader dies then the business also dissolves. You might think that’s the end of the matter, but due to inheritance tax, it almost certainly isn’t!
Suppose, for instance, that you are a sole trader running your own plumbing business. What would happen if you had an accident one day, leaving you unable to go out and work?
It is almost certain that your income would dramatically reduce, whilst your expenses carried on (e.g. weekly food shop, mortgage payments etc.). Even with a large emergency fund to keep you going for the short term, it wouldn’t take long before you ran into financial trouble.
This is where careful financial planning can add a lot of value, protecting both you and your business whilst you get back on your feet. A good income protection policy, for instance, might help you continue to cover your essential costs if you suddenly find yourself unable to work.
You also need to consider what would happen to your estate when you die. As a sole trader, the assets and debts of your business (e.g. company van and outstanding business loans) are added to your personal ones (e.g. your car and mortgage). If you are not careful, then you could leave your beneficiaries in a difficult position when the executors are sorting out the inheritance tax due on your estate. Here, a strong life insurance policy might be the best way forward to help settle any outstanding debts and taxes.
If one of the partners in a partnership dies, then legally it ceases to exist (although that does not necessarily mean the end of the business). Here, the business share of the deceased will typically fall into their estate.
This can make things complicated if there is no pre-written agreement in place, stipulating what should happen when a partner dies. For instance, the deceased’s family might want to sell the share of the business back to the remaining partner, but this person might not have the funds needed in order to buy them out.
This could result in the deceased’s family (e.g. a spouse) continuing to own the business share, without wanting any involvement in the business. Or, it could lead to the shares being sold on to somebody else.
Quite often, a life insurance strategy and pre-written agreements between the business partners is a good way to future-proof a partnership against these kinds of negative outcomes. Get in touch if you would like to know more.
Limited Liability Companies
A limited company faces somewhat similar challenges to a partnership when a shareholder dies. This person’s shares are typically brought into their estate, which the family often then seeks to sell. Without sufficient funds to buy the shares, however, the remaining shareholders can be placed in a difficult position.
Once again, life insurance can offer a great way for shareholders to ensure they have the lump sums required to buy one another’s shares, if and when required.
Yet the death of a shareholder isn’t the only potential future issue to address. A limited company still faces the question of what would practically happen to the business if a director or key decision maker died, or was left unable to work for long periods of time (e.g. due to ill health).
It isn’t just the absence of a company director which can cause problems, however. Similar issues can emerge in the event of a sales director’s death, for instance, or the long-term illness of an IT specialist within the business.
Here, key person protection can be a sensible option as a means of planning for these contingencies. In this case, an insurance policy would pay out an agreed sum to the business in the event of a key person’s death or serious illness, allowing the business to cover some/all of the financial losses which might have otherwise occurred.
Would your business survive without you? For sole traders, perhaps you hope that a trusted colleague, family member or friend would step up to the mark and take over the reins when you eventually die. Or, perhaps you are happy to let your business cease trading and pass on your assets to your beneficiaries. Either way, you need a strong financial plan in place to make sure you have covered all of the bases and avoid potential pitfalls with possible taxes and debts.
For partners and shareholders, consider the impact on your business if someone crucial to its operation was suddenly removed from the equation. Would your company be able to at least stay afloat, if not thrive? Do you have the adequate provisions in place to make sure that the company can move forward without one or more of its limbs tied?
To discuss these matters with one of our financial planners, get in touch today to arrange a free, no-commitment financial consultation with a member of our team.