Estate planning for business owners

For many business owners the day-to-day running of the business can be all-consuming, meaning that contemplating the risks to the business that would arise in the event they should lose mental capacity, or die, naturally tend to fall down the priority list.

None of us enjoys confronting our own demise, but most of us recognise the need to have a will and Lasting Powers of Attorney (LPAs) in place to deal with our personal affairs. What tends to be considered less is putting in place similar legal instruments what would help protect your business.

There are three key documents to consider:

1. Business LPAs

If a business owner loses capacity and there is no Lasting Power of Attorney, it may be impossible for anyone else to deal with the management of key aspects of the business such as property and finances. The worst case scenario is that this could result in employees not receiving their wages and creditors not being paid, leading to potential debt recovery actions and even proceedings to wind up the business.

Even if you already have a Property and Financial Affairs Lasting Power of Attorney in place, the person you appoint to deal with your personal finances (usually the spouse, a friend or a family member) may not be equipped with the specialist knowledge required to deal with your business interests.

In having two separate LPAs, one to deal with your personal financial affairs and another for your business affairs, you can appoint different people with the right expertise to act in your best interests and ensure the continuity of the business in the event of incapacity or death.

2. Shareholder Agreements

In the absence of a shareholder agreement, when a business owner dies their share of the business will be passed by way of their will or intestacy (in the absence of a will). The result for the business could be that the business interest passes to a spouse or family member who may not be involved (or interested) in the business and this person would now be integral to the running of the business.

A shareholder agreement can be invaluable in ensuring that the control of the business is retained by those involved with the business. It can also provide that, upon the death of a shareholder, the estate will receive the equivalent value of the shares and that the business has an option to purchase the shares – usually funded by an insurance policy.

A shareholder agreement is not confined to dealing with the death of a shareholder but can also include provisions should any of the owners wish to sell their interest, recording agreement between those involved in the business and mitigating any possible conflict between owners and prospective owners in the future.

3. Wills

In current legislation there are valuable inheritance tax reliefs – Business Property Relief and/or Agricultural Property Reliefs – which can be applicable to business interests. A well drafted Will can result in the mitigation of tax taking advantage of available reliefs. A Will, together with a shareholders agreement, can help avoid the scenario whereby the beneficiaries of the shareholder’s estate wish to sell the shares and the remaining shareholders may have to find the funds to purchase the shares in order to retain control of the business in order to prevent them being sold to a third party.

For clear, straight-talking legal advice on estate planning and to ensure your business is protected, contact Lorna Bastian on lbastian@aquabridgelaw.co.uk