Future-proof your Business with a Company Will

A Typical Scenario

You are in business as a limited company with two shareholders. Your business partner and fellow 50% shareholder sadly and unexpectedly dies. What about the long-term future of the company? What happens to the deceased’s shares? If you don’t know the answer, then you should be talking to someone about a Company Will.

What is a Company Will?

A Company Will, sometimes referred to as a “Cross-Option” agreement, is simply an agreement between the shareholders to determine what happens to the company’s shares if a fellow shareholder were to die. The objective is to enable a business to continue, by avoiding the dilution of the shareholding to people previously outside of the company. The point is, you don’t know or won’t have control over who the shares will go to on the death of your fellow shareholder or how that new shareholder will use them. Do you want to “inherit” a new shareholder who suddenly becomes active in the day to day running of the business?

Some forward planning now, can provide future control and certainty.

The Mechanics

 The key terms of the agreement are:-

  • The mechanism to calculate the value of the deceased’s shares at the time of the transfer, supported by a series of life assurance policies and trusts.
  • The life assurance provides the finance to cover the transfer of the deceased’s shares, whilst the trust element ensures the proceeds of the life policies are paid immediately and are free of inheritance tax.
  • The agreement contains the option for the surviving shareholder to buy the shares from the deceased shareholder’s executors (a “call” option), and legal representatives of the deceased shareholder will have the option to sell the shares (a “put” option) to the surviving shareholder.
  • If the surviving shareholder or deceased’s legal representatives decide to “put” or “call”, then the shares must be bought or sold.
  • As it is possible that neither side will exercise their option, the agreement is not binding and business property relief for inheritance tax purposes is preserved.

Often the Company Will is drafted in conjunction with a shareholders’ agreement to provide as much certainty over the future of the shares as possible.

Critical Illness

 The agreement can be expanded to cover critical illness where the illness  means a shareholder is unable to work. If this option is included, the agreement will clearly specify the circumstances under which the option could be exercised.

Partnerships

The same consideration applies to partnerships, where the situation is even more precarious. The death of a partner can lead to automatic dissolution, unless specifically addressed in the Partnership Agreement.

 Next Steps

The drafting of the Company Will need not be complicated or expensive and Life Insurance and Critical Illness quotes can easily be obtained. A plan can help to avoid changes in the company or partnership power and avoid financial difficulties for dependents. In our experience it pays to be prepared and we would be happy to arrange a no obligation meeting with you to discuss the process.

Contact rhw today. email   call 01483 302000