2017 was a record year for new business start-ups in Ireland. Sixty-one new companies formed daily, which surpassed the previous record year for start-ups in 1998, where the number was fifty-eight daily.  (Vision-Net 2018 annual review).

Setting up a business is a big decision, whether it be your first step into the world of business or a leap of faith moving from permanent employment and going it alone.

In Ireland there are thousands of businesses operating within the building sector. Typically there are at least two business owners/shareholders in an Irish SME. In most businesses the ‘other’ partner is normally one of the following: a brother; a sister; a friend; or someone with a specific set of skills. Someone you know and trust and have worked with for a number of years. A strong partnership and a desire to succeed form the lifeblood of any company with the ultimate aim to make the business a success.

Economic, political and trading environments can cause challenges for any business. These are the types of challenges in which owners and directors have a vested interest to work through and resolve to drive the business forward.

Running a business is not a walk in the park. You have responsibilities with regards to employees’ welfare and many legal and compliance hurdles to overcome. It’s not just a case of opening the doors, trading and going home. Being your own boss is a twenty four/seven job. Granted, you are your own boss and you can make the decisions and take the company in the direction that you want to but the wrong decisions are also your responsibility.

You have to be specialised and become experienced in all aspects of commerce. From the hiring and firing to finance and HR and everything in-between. You have the overall responsibility for staff and stock and assets and cash flow as well as dealing with banks, accountants, solicitors and the revenue.

Business partners and key staff will support you as they should have the same desire and goals for the business. Financial structures will support the business to ensure good cash flow, survival and growth. Insurance will protect you and your assets from accidents, claims and business disruption as well as your company vehicles, technology and stock.

But our biggest asset, in most cases, is not our stock or ideas. It is us, the directors and key staff, the people who drive the business.

The sudden death or illness of a director can cause problems for both the surviving director/s and the deceased’s next-of-kin. It’s not the most glamorous of topics to insert into a business meeting agenda, but it is definitely a financially prudent thing for all companies to consider, especially if the directors have families or other financial dependents.

Following the death of a shareholder there are a number of consequences for surviving shareholders and the deceased shareholder’s next-of-kin.

Who is now in control of the business?

If the deceased director owned more than 50% of the business, the new controlling shareholder will be the next-of-kin or other beneficiaries of the deceased director’s estate.  The next-of-kin or other beneficiaries may be completely inexperienced or have no desire to work in the business. A surviving shareholder who may have worked for years in a business can now find themselves as a minority shareholder.

The new beneficiaries won’t sell:

If the surviving director/s have the liquid capital to buy the shares back from the next-of-kin or other beneficiaries but they won’t sell, what happens now? The surviving business directors could find themselves working with a new director who has a different outlook on how the business should be run or on the direction that it should take.

I don’t have the capital:

If the next-of-kin or other beneficiaries are willing to sell but the surviving directors don’t have the capital to buy, what happens then? Do the surviving director’s borrow the money to purchase the shares? This is another added financial burden on the business that it may not want to take.

Sale to a complete stranger or even a competitor:

If the next-of-kin or other beneficiaries are entitled to sell their inherited shares in the company, they may do so to an outside third party, even a competitor.

Holding an asset with no income or potential:

What if the shares are not sold or can’t be sold?  The Articles of Association may allow other shareholders to block the sale of shares to an outside party leaving the next-of-kin with a shareholding worth nothing.

Paper Assets:

The deceased director’s salary will stop on death. The next-of-kin will now be financially affected, especially if the shares do not generate any income. Also, what if the shares give rise to a tax liability at the same time?

Is there a solution to the problems above?

Yes, and it’s a simple effective solution:  Corporate Shareholder Protection

A business shareholding could be one of our biggest assets, so we really should consider protecting it, much the same as we would protect our home with house insurance and life assurance.

Corporate shareholder protection is designed to cover the shareholders, the company and the beneficiaries in a tax efficient way.

The company enters into an arrangement (a buy/sell agreement) with a shareholder to buy back their shares from their personal representatives on death. The company effects a life assurance policy on each shareholder to provide funds to enable the company to buy the deceased directors shares on death.

The company pays the premiums on the cover but they are not tax deductible. The benefits paid out are likely to be exempt from corporation tax. Subject to all agreements being in place (buy/sell agreement etc), the deceased shareholder’s personal representatives would only be liable to Capital Gains Tax and this would only arise in respect of any increase in value of the shares from the date of death to the date of sale. (This is our opinion of the current legislation and revenue practice).

Are there any other benefits?

Yes. Following the buyback of shares by a company, the shares are cancelled. The surviving directors will not gain any increase in the number of shares they hold, but the percentage holding in the business will increase.

Other features include peace of mind, directors knowing that they will retain control of the company and that the deceased directors’ beneficiaries would not be obliged to become involved in the business. Ownership can be maintained by the surviving directors and the business can continue with minimal disruption.

Corporate shareholder protection it is more sensible to have than car insurance for a company car, but one is a legal requirement and the other is not. One protects the value of a business and the other protects the value of a car.

At Investec Wealth & Investment our job is to comprehensively understand your personal needs and to provide solutions to ensure all contingencies are covered, be it retirement planning, tax planning, succession planning or protection for all eventualities. If you would like to discuss our approach in greater detail and explore how Investec Wealth & Investment could be of assistance to you and to your family, please do not hesitate to contact us.

If you would like to discuss any of the topics raised in this article, please contact Brian at brian.kingston@investec.ie.

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