The importance of getting your business in order

The to-do list for business owners can seem interminable sometimes and it is often the administrative tasks which get pushed back in favour of more immediate business or client / customer needs.

However, it is important to make time to think about all the things you need in place to ensure the smooth running of your business – particularly in the event that you become ill, in any way incapacitated or worse, you die.

Of course, nobody likes to think about such an eventuality but it is a very practical and necessary consideration.

Thankfully, there are many ways you can protect your business – from business Lasting Powers of Attorney and tax considerations to share option agreements and Key Man Insurance, as Nicola Dudley, partner in our Private Wealth & Tax team discusses.

Business Lasting Power of Attorney

If you become incapacitated in some way having a Business Lasting Power of Attorney in place can help.

It will enable you, as the business owner, to authorise an Attorney to make decisions concerning the business should you become unavailable through illness or if you lack mental or physical capacity.

The sorts of decisions that can be taken by an Attorney on your behalf include:

• Agreeing business contracts
• The acquisition or disposal of business property
• Paying wages, tax or VAT
• Hiring or removing employees
• Marketing, litigation, discharging debts; and
• Winding up the business

However, a distinction should be made between running a business and working in it. The Business Lasting Power of Attorney would only relate to running the business and can be general or tailored to specific business needs.

A Tax Efficient Will

If the business interest qualifies for Business Property Relief for Inheritance Tax purposes, then a Will can be structured to utilise the potential Inheritance Tax saving.

It can also help to ensure that the beneficiaries receive fair value for your business interest, whilst also protecting the personal wealth of the remaining shareholders or partners.

If the business interest is not specifically dealt with in a Will, then your family will inherit and be entitled to be directly involved in the running of the business. You may or may not want this to happen.

Not only could your family have conflicting views on the business enterprise, they may also be in the process of divorcing or wish to sell their interest to someone outside the family, which could adversely affect the business itself, so you need to think about how to deal with business interests in your Will.

Share Option Agreements and Key Man Insurance

In order to control who is entitled to a business interest following your death, it is important to have a Share Option Agreement in place to ensure that the shares in the company are offered to the remaining business owners or shareholders, rather than be inherited by the beneficiaries.

In this way, the other owners or shareholders will have the option to purchase the shares or interest from the deceased’s estate and retain control of the business and the family will receive the market value.

To provide funds to purchase the shares from the family, Key Man Insurance (also known as Key Person Insurance) should be in place on the lives of the business owners.

To ensure that the value of the life policy is available to purchase the shares the policy proceeds should be written into trust for the surviving business owners.

Upon death, the policy proceeds will not pass to the family under the Will but will pass into the trust and be available to purchase the shares from the estate. The policy proceeds will not themselves be subject to Inheritance Tax because they will be in trust, but it is important that the life policy is put into the correct type of Trust.

Whilst it is hard to make time to think about getting your business administration tasks in order, it is important to invest the time now to avoid potential disruption in the future – both for your business and your family.

Photo by Alvaro Reyes on Unsplash