Shareholder and Partnership Protection
Who would own your business if a co-owner died?
Shareholder and partnership protection gives the remaining owners the money to buy a shareholder's or partner's stake if they die or become critically ill.
Without a plan, shares usually pass to the owner's family under their will. You could find yourself in business with people who didn't choose to be involved, while the family waits for a fair price that no one has the money to pay.
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At a glance
What it solves
Who buys a co-owner's stake, and how they pay for it
Who pays
Usually each owner, for cover on their own life
Who receives
The remaining owners, normally through a business trust
Works with
A shareholder or partnership agreement, and usually a cross-option agreement
Authorised and regulated by the Financial Conduct Authority. FCA No. 1034779
A co-owner's death can change who controls the business
In most private companies and partnerships, the owners work closely together and trust each other. That's exactly why it matters what happens to an owner's share if they die or become too ill to work.
Shares form part of the owner's estate. Unless something else has been agreed, they pass to whoever inherits them. The family may want money rather than shares, and the surviving owners may want control, but neither side may have the funds or the agreement to make that happen.
Two reasonable wishes can collide: the family needs a fair price, and the remaining owners need control.
Without a plan
- Shares pass to the family under the will
- Remaining owners may have no right to buy them
- The family may hold shares they can't easily sell
- Any purchase has to be funded from savings or borrowing
With a plan
- An agreement sets out what happens to the shares
- Insurance provides the money when it's needed
- The family receives a fair value for the stake
- Control stays with the people running the business
What can happen if nothing is in place
These problems often arrive at the same time, when everyone involved is grieving.
- Loss of controlA family member, or someone they sell to, could gain a say in how the business is run.
- Disputes over valueWithout an agreed basis for valuing the shares, agreeing a fair price can be slow and stressful.
- No money to buy the sharesThe remaining owners may not have the personal funds, and borrowing may be hard at a difficult time.
- Financial pressure on the familyThe family may need money urgently but hold shares that pay little or nothing.
- Uncertainty for the businessStaff, clients, lenders and suppliers may worry about who is in charge.
- A stake sold to an outsiderDepending on the company's articles, shares could end up with someone who has no interest in the business.
How shareholder and partnership protection works
The most common arrangement uses a life policy on each owner, held in a business trust for the other owners, alongside a legal agreement about buying the shares.
We agree a value
The owners agree how the business and each stake will be valued, usually with input from their accountant.
Each owner takes out cover
Typically each owner has a policy on their own life for the value of their stake. It can include critical illness cover.
Policies are placed in trust
Each policy is written into a business trust for the other owners, so a claim is paid to them rather than into the owner's estate.
A legal agreement is put in place
A cross-option agreement, drawn up by a solicitor, gives each side the option to buy or sell the shares if an owner dies or, where included, becomes critically ill.
If a claim is made
The remaining owners use the money to buy the shares, and the family receives the agreed value.
Who it is suitable for
It's relevant whenever a business has more than one owner.
- Private limited companies with two or more shareholders
- Partnerships and limited liability partnerships
- Owners who want control to stay with the people running the business
- Businesses with a shareholder agreement that doesn't say how a buy-out would be paid for
- New shareholders joining, or shareholdings changing
- Businesses whose value has grown since cover was last reviewed
When it may not be the right answer
If you're the only shareholder, there's no co-owner to buy your shares, so the question becomes succession, key person cover or your own family's protection. And shareholder protection doesn't replace lost profit: that's what key person protection is for.
Practical examples
These examples are illustrative only. The businesses and people are fictional, not clients, and any outcome would depend on underwriting, the policy terms and a valid claim.
- Illustrative example · Two-director company
Equal owners, no plan
Two directors each own half of a successful IT services company. Neither has a plan for what happens to the other's shares.
If one died: the shares could pass to a spouse who has no role in the business but needs an income.
With cover and an agreement in place: if a claim were paid, the surviving director could use the money to buy the shares at the agreed value, and the family would receive that value.
- Illustrative example · Accountancy partnership
A partner who can no longer work
One of three partners is diagnosed with a serious illness and has to stop working.
Without a plan: the remaining partners may struggle to fund the purchase of her share.
With critical illness cover and a suitable agreement: if a claim were paid, the money could fund the purchase, giving her money when she needs it and the practice continuity.
- Illustrative example · Growing business
Cover that hasn't kept pace
Three shareholders took out cover when the business was worth a fraction of its current value.
The risk: a payout would fall well short of a fair price for the shares.
After a review: cover can be brought into line with what the business is worth today.
Common questions
What is a cross-option agreement?
It's a legal agreement between the owners. If one dies, the surviving owners have the option to buy their shares, and the deceased owner's estate has the option to sell. It's often preferred to a binding agreement to buy and sell, because a binding contract can affect inheritance tax relief on the shares. Your solicitor and accountant should confirm what's right for you.
How is this different from key person protection?
Key person protection pays the business to cover lost profit and disruption. Shareholder and partnership protection pays the remaining owners so they can buy a stake. They answer different questions, and many businesses need both.
How much cover do we need?
Enough to buy each owner's stake at its current value. That means agreeing a valuation basis, usually with your accountant, and reviewing the cover as the business grows.
Who pays the premiums?
In the most common arrangement, each owner pays for the policy on their own life. Premiums depend on age, health and the amount of cover, so the cost can differ between owners. Other structures exist, and the right one depends on your circumstances.
Can the company buy back the shares instead?
In some cases a company can buy its own shares, and policies can be arranged to fund that. It involves company law and tax rules, so it's set up with your solicitor and accountant.
Does it work for partnerships and LLPs?
Yes. The principle is the same: the remaining partners or members have the money to buy the outgoing partner's share. The arrangement needs to fit your partnership deed or LLP agreement.
Do we need a shareholder agreement?
It isn't required for the insurance itself, but it's important that your articles and any shareholder agreement work with the arrangement. I'm happy to work with your solicitor on this.
Policies pay out only on a valid claim and have no cash value. Trusts, legal agreements and tax advice are not regulated by the Financial Conduct Authority, so take legal and tax advice on the agreement and trust. Tax treatment depends on individual circumstances and may change. Whether premiums qualify as an allowable business expense depends on the circumstances and applicable HMRC rules.
Find out where your business stands
The Business Resilience Health Check takes a few minutes and shows which risks apply to your business. Or book a conversation: I meet business owners in Birmingham and the West Midlands in person, and advise across the UK by phone and video call.
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