According to reports, more than 835,000 new businesses registered in the UK in 2020. This could mean that if you’re a legal professional or accountant you’re dealing with more directors than ever before.
While some directors will be building companies that are still relatively young, others could be running established firms they have worked hard to build. As such, they may work with fellow directors and shareholders, all of whom play a part in the business’s success.
But what would happen to the company if your client died? Would the company survive, and would their family need to sell the shares to release much-needed capital? If so, would they sell to one of the company’s competitors?
It’s not just death that your client may need to consider. If diagnosed with an illness that means they can’t work for an extended period, would they need to draw a wage from the company while it’s also paying for their replacement?
Read on to discover how financial planners could help your clients protect their company should anything happen to them, to key people within the business, or to fellow directors.
1. In the event of a death, the company’s future need not be put at risk
Shareholder or partnership protection is life cover taken out on company directors. Typically, the remaining directors will be the beneficiaries, allowing them to buy back shares from the deceased person’s family.
The purchase of the shares helps provide financial support for the deceased’s family, while allowing the business to continue as normal. Most importantly, it removes the risk of unwanted parties buying into the company.
A key part of the protection strategy is to create a cross option agreement, which forms a binding agreement that the deceased’s shares are made available to the remaining directors for purchase. It also binds the directors into buying them.
2. If your client cannot work, they could ease the impact on their company
Your client can also protect the business should they or another director be diagnosed with a long-term illness.
Critical illness cover (CIC) provides a lump sum to the remaining directors that again they can use to buy the other director’s shares.
This might help your client maintain their lifestyle without needing to draw an income from the company, or pay for much-needed private medical treatment. Without cover though, the company may have to continue paying your client while also paying a stand-in or a replacement, potentially putting a financial strain on the business.
Normally, a legal agreement is created with the cover, which means that remaining directors must buy the shares if your client suffers ill health and wants to sell them. That said, it does not obligate them to sell.
3. If your client is key to the success of the company, it can protect itself against losing them
If your client is vital to the success of the company, it’s possible to create a financial safety net for the business should anything happen to them. Known as “key person insurance”, the company can also set this up for anyone who is critical to the success of the firm.
Typically, the protection covers those in important positions such as:
- Managing directors
- Sales managers
- Research and development staff
- Creative specialists
- Technical experts
- Sole traders
Losing a key person because of death or illness can affect customer confidence and result in lenders calling in loans. For this reason, the cover typically protects against loss of profit or the expense of replacing the individual to ensure the future of the company.
A financial planner can help
As legal professionals or accountants, helping clients better protect themselves and their company from the financial implications of the unexpected is critical.
Working with financial planners can help you provide an additional layer of support to your clients, and enhance your service and your reputation. If you would like us to help a client who is a director of a company, please email email@example.com or call 01904 655 330.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
Please note, this article only deals with England and our understanding of English Law.