Business Protection

Sole Trader

The sole trader has his own business planning needs which need to be considered separately from personal/family arrangements.

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Partnership Protection / Shareholder Protection

A Partnership is defined in law under The Partnership Act 1890 as 'the relationship which exists between persons carrying on a business in common with a view of profit'. The partners each may provide capital for investment and will divide any profits between themselves. In England a partnership does not have an individual legal identity from the individuals who constitute the partnership. In Scotland the position is different.

Private companies are run by Shareholders or directors. On the death of such a director, the surviving directors run the risk of the deceased's shares passing to someone with no interest in the company.

Life assurance can place funds in the hands of remaining partners/directors to purchase a deceased partner/director's share. This ensures that funds are available when required. Life assurance should be arranged under an appropriate trust from inception and in conjunction with an appropriate partnership agreement.

Agreements can take the form of:

Buy and Sell Agreement - the advantage of this is that the partners/directors know exactly what will happen, but there are distinct inheritance tax disadvantages as generally Business Property Relief is not available.

Cross Option Agreement - this gives the surviving partners/directors an option to buy the deceased's share within a specified period, usually six months. The disadvantage of this is that it is based on options rather than obligations. The advantage is that it does not prejudice the availability of Business Property Relief.

The partners/directors have an obligation to effect and maintain life policies on their own lives. Regular review is therefore necessary, and costs can be apportioned between partners/directors.

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Keyperson Insurance

In most organisations, it is possible to identify certain individuals whose contribution is particularly important. Their loss could result in loss of profits, the business not being able to service or repay outstanding loans, or the need to curtail plans for expansion.

A variety of plans could be effected to protect profits, loans and investments, in some cases Permanent Health Insurance plans may also be appropriate.

It is difficult to recommend a level of cover because of the number of variables involved, however some methods of calculation include:

• Multiple of salary
• Proportion of total salary bill
• Multiple of profits
  

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