Business intestacy audit

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For customers Business intestacy audit If you re a business owner, have you thought about a business will? If not, use this business intestacy audit with your inancial adviser to help match your business s aspirations with reality. What s a business will? It s a formal agreement or special provision put in place that details what should happen to your share of the business and your liabilities if you die or become critically ill. Do I need one? As a business owner, have you thought about what would happen if you or one of your co-owners were to die or become seriously ill? Do you have an exit strategy in place for the death of an owner? Where would the money come from to buy the deceased s share in the business? Do the business owners have an agreement in place to make sure the surviving owners can buyout the shares of the deceased? We can help If you don t have a business will, use this questionnaire to make sure that what you want to happen to your share of your business should you die or become critically ill actually happens. The following information is based on our understanding of current legislation, taxation law and HM Revenue & Customs (HMRC) practice, which may change. What s business intestacy? It s what will happen as a result of not having a business will. When we talk about a business owner, this could be a partner, member of a limited liability partnership (LLP) or shareholding director.

Partner death of an owner What you d like your widow(er), dependants or other beneficiaries under your personal will to have 1 The continuing right to share in proits as a partner. No. Under the Partnership Act 1890 (PA), the partnership is dissolved on death if there s no agreement to say otherwise. Even if the business isn t dissolved and the surviving partners carry on trading, there s no inherited right to become a partner. But the deceased s personal representatives would be entitled to the same share of proits as the deceased would have been, or interest at 5% a year on that share of assets. 2 A right to call for the repayment of any debt (loan account) owed to you by the business. 3 A right to wind up the business to get an amount representing the value of your interest in the business. 4 A right to force the surviving partners to buy your interest in the business. 5 A right to sell your interest in the business to any willing buyer on the open market. 6 An obligation to sell your interest in the business to the surviving partners. Yes. These loans would normally be repayable on demand unless otherwise speciied in the agreement or there s a provision in the deceased s will telling the personal representatives not to call in the loan. But the business would need access to available funds to actually repay the loan. No. But the business is automatically dissolved (see (1) above). The business would be dissolved under the PA, unless there s a diferent provision in the partnership agreement. But the value they receive might be less than they d like. No. The PA says the partnership has to be dissolved. No. The PA says the partnership has to be dissolved. Even if it s not dissolved, there can t be a sale as what s inherited is the value of the interest, not the actual share of the business. No. See (4) above. Page 2 of 8

Partner critical illness of an owner What you d like to have as a critically ill partner 1 A right to an unreduced share in proits throughout the term of the critical illness, regardless of whether you re working or not. Yes. This is set out in the Partnership Act 1890, unless the partnership agreement says otherwise. 2 A right to sell your business interest to the co-partners. 3 A right to sell your business interest to a willing buyer on the open market. No. And the partnership won t automatically be dissolved, as it might be if you died. Yes - in theory, but it s highly unlikely. The co-partners don t have to carry on in partnership with a buyer they don t want to work with. In practice, only a buyer the continuing partners were happy with would buy in like this. It might be possible to sell/assign for value your rights to proits but this might not be possible in practice. 4 A right to wind up the business. No. The automatic statutory dissolving of the partnership is on death only. 5 An obligation to sell your business interest to the co-partners. 6 A right to call for the repayment of any outstanding loan you ve made to the business (loan account). No, unless it says this in the partnership agreement. Yes. These loans would usually have to be paid back if you asked, subject to any other agreements in place. Page 3 of 8

Member of an LLP death of an owner What you d like your widow(er), dependants or other beneficiaries under your personal will to have 1 The continuing right to share in proits as a member. (Most likely) No. There s most likely to be a member s agreement specifying what should happen. It s unlikely that any continued rights to share in proits would be given to a member s widow(er) or partner. If there were only two members, one died and no other member joined within six months, the LLP would automatically be dissolved under the LLP Act 2000. 2 A right to call for the repayment of any debt (loan account) owed to you by the business. 3 A right to wind up the business to get an amount representing the value of your interest in the business. 4 A right to force the surviving members to buy your interest in the business. 5 A right to sell your interest in the business to any willing buyer on the open market. 6 An obligation to sell your interest in the business to the surviving members. Yes. These loans would normally be repayable on demand unless otherwise speciied in the agreement or there s a provision in the deceased s will telling the personal representatives not to call in the loan. But the business would need access to available funds to actually repay the loan. No. No. No. There can t be a sale as what s inherited is the value of the interest, not an actual share of the business. No. Page 4 of 8

Member of an LLP critical illness of an owner What you d like to have as a critically ill partner 1 A right to an unreduced share in proits throughout the term of the critical illness, regardless of whether you re working or not. Yes. As a critically ill member, you continue to be entitled to your share of the proits, unless there s an agreement that says otherwise. 2 A right to sell your business interest to the co-members. 3 A right to sell your business interest to a willing buyer on the open market. No. Yes - in theory, but it s highly unlikely. The continuing members don t have to carry on in partnership with a buyer they don t want to work with. In practice only a buyer the continuing members were happy with would buy in like this. It might be possible to sell/assign for value your rights to proits but this might be diicult in practice. 4 A right to wind up the business. No. The automatic statutory dissolving of the partnership is on death only. 5 An obligation to sell your business interest to the co-members. 6 A right to call for the repayment of any outstanding loan you ve made to the business (loan account). No, unless it says this in the member s agreement. Yes. These loans would usually have to be paid back if you asked, subject to any other agreements in place. Page 5 of 8

Shareholding directors death of an owner What you d like your widow(er), dependants or other beneficiaries under your personal will to have 1 The right to be appointed a director with accompanying rights to directors fees. 2 The right, as shareholders, to any dividends declared. 3 The right to call for the repayment of any outstanding directors loans owed to you. 4 The right to sell the inherited shares to the continuing shareholders and force them to buy. 5 The right to sell the inherited shares to any willing buyer on the open market. Minority or 50/50 shareholder: No. Directors are appointed by a majority of shareholders (51%). Majority shareholder: Yes. Yes. But dividends are recommended by a majority vote of the board and agreed by a majority vote of the shareholders. So a minority or 50/50 shareholder will have no power to force dividend declaration. And if proits are reduced then a dividend might not be inancially feasible anyway. Yes. These loans would normally be repayable on demand, subject to any special terms in the agreement or any provision in the deceased s will telling the personal representatives not to call in the loan. No. Model articles, or Table A articles from the Companies Act wouldn t provide this but there might be a right of irst refusal see (5) below. Yes. There might be a provision in the articles though, giving the continuing shareholders the right of irst refusal for a limited time. There might also be a provision enabling the continuing shareholders/ directors to refuse to register a transfer of shares. But this shouldn t be unreasonably prevented. 6 The right to sell the inherited shares to the company and to force the company to buy (and cancel) the shares. No. A corporate share purchase would normally be permitted under standard articles but there would be no compulsion for the company to buy. But if you have a majority shareholding and wanted a corporate share purchase this could then happen, as long as the statutory conditions were satisied. 7 An obligation to sell the inherited shares to the company or to the continuing shareholders if requested. No. See (4) and (6) above. Page 6 of 8

Shareholding directors critical illness of an owner What you d like to have as a critically ill partner 1 A right to continue receiving directors fees indeinitely. No. Lifetime service agreements aren t possible ive years is the longest. In practice, directors can be dismissed by a majority vote of the shareholders with compensation for the remainder of their service contract. Under a yearly appointment, fees are voted yearly. If you ve a majority shareholding then reappointment as a director will be easier. 2 A right to continue to be entitled to dividends. 3 A right to call for the immediate repayment of any outstanding loan made to the company (loan account). 4 A right to sell shares to the co-shareholders and force them to buy. 5 A right to sell shares to the company and force it to buy. 6 A right to sell shares to a willing buyer on the open market. 7 An obligation to sell shares (if requested) to the co-shareholders/company. Yes, if any are declared which isn t guaranteed. Dividends are recommended by the board and voted for by the majority of shareholders. So a majority shareholder would have control over this process, but minority and 50/50 shareholders wouldn t. And if proits are reduced, a dividend may well not be inancially possible. Yes. These loans would usually have to be paid back if you asked, subject to any other agreements in place. No. Mutual agreement is, of course, possible, but model articles or Table A articles adopted unamended from the Companies Act (CA) wouldn t make it compulsory, though they might include a right of irst refusal see (6) below. No. A corporate share purchase would usually be allowed, but not compulsory. But a majority shareholder could make sure that this will happen, as long as the statutory conditions were satisied. Yes. Though the articles might give the continuing shareholders the right of irst refusal for a limited time. There might also be a provision that lets the continuing shareholders/directors refuse to register a transfer of shares. But this shouldn t be unreasonably prevented. No. Model articles or Table A articles adopted unamended from the CA wouldn t provide this, though there might be a right of irst refusal see (6) above. Individual and corporate share purchase would normally be allowed, and parties can reach a mutually acceptable agreement. Page 7 of 8

So, do you need a business will? Is what will happen to your business assets and liabilities the same as what you d like to happen if you die or become critically ill? If not, it s really important to speak to your adviser and put in place arrangements that reflect your wishes and those of your co-owners and your families. aegon.co.uk @aegonuk Aegon UK Aegon UK Aegon is a brand name of Scottish Equitable plc. Scottish Equitable plc, registered oice: Edinburgh Park, Edinburgh EH12 9SE. Registered in Scotland (No. 144517). Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number 165548. An Aegon company. www.aegon.co.uk 2018 Aegon UK plc IP 00270650 06/18