Whether you run your own practice, an SME or a large company, there are various aspects to consider when you are in partnership with another person. Getting good financial and legal advice is a small price to pay when it comes to protecting your business.
A factor which gets overlooked is what will happen to you and your business if your business partner dies. Their death could have a negative impact on your employees, your finances, your business and your mental health. It can also lead to litigation.
A common scenario
When two people start a business they have a business plan in place, emergency funds and a great working partnership. Perhaps one partner is the ‘face’ of the business, while the other is the person behind the scenes; working on the fine detail such as accounts and business strategy. If one of the key elements is lost (i.e. your business partner dies), the dynamic changes.
This is where a contingency plan is vital
When a business is started, costs and budgeting can be the primary concern. Discussions around what would happen to a fledgling business if one of you dies is probably far from your minds, especially in the first throes of getting clients, and getting your enterprise off the ground. Dying is also a distressing and often emotional area. Talking about dying can be too uncomfortable.
At some point however, you will need a written partnership agreement. The agreement should be regularly reviewed, as circumstances change and so might the requirements of you and your partner as the business grows.
Without a watertight agreement the death of one business partner can be equated to dying without a legal Will in place. The repercussions can be enormous.
The Partnership Act 1890: Your contingency plan
A business partnership can arise through oral agreement, conduct or a formal written agreement, known as the Partnership Act 1890.
This is an Act of the UK Parliament which defines a partnership as: “the relation which subsists between persons carrying on a business in common with a view of profit”.
The provisions of the Act include:
- Minimum number of partners is two, and the maximum is unlimited (this stipulation came into effect in 2002).
- Partners are entitled to:
- Participate in management
- Have an equal share of the profit
- The right not to be expelled by other partners
- The right to an indemnity for liabilities as a result of the business.
When a partner dies, the partnership ends unless stipulated otherwise by the partners.
The Partnership Act also looks at how assets and debts of a business will be distributed in the event of the business folding; usually amongst the surviving partner(s).
Solutions and Strategies
- Buy a life insurance policy which protects the business owners. If a business partner dies, this can be used to buy the deceased partner’s shares. It also means the deceased’s family won’t have to liquidate assets to buy remaining shares.
- Buy-Sell Agreement: when one partner dies the other partner(s) are legally entitled to buy out the deceased partner’s share in the business.
- Cross-Purchase Buy-Sell Agreement: both partners buy a Life Insurance policy for each other. If one partner passes away, the remaining partner can use the policy funds to run the business. They can also buy the deceased’s family’s business shares.
If you’d like advice on creating an effective partnership plan, we’re here to help.
Or if your business partner has passed away and you’re unclear on your next steps, get in touch.
Book an appointment with an Adviser now.
Email: info@lloydwhyte.com
- https://www.legislation.gov.uk/ukpga/Vict/53-54/39/section/1
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