The Financial Implications of a Shareholder Dying
A conversation I quite often have with business owners, revolves around me asking what they would do, if a shareholder of the business were to die and where their shares would go. More often than not, the business owner has no idea and is unaware of the implications on the business.
A simple example is where you have 2 directors of a business holding 50% each of the shares in the Company. What clients don’t tend to realise, is that if one of the directors were to die, their shares would go to their spouse, which means that their spouse then has an interest in the business and is allowed to take dividends from the business.
However, often in reality, what the spouse really wants, is the value of the shares in cash and the remaining shareholder really doesn’t want someone in the business who does not understand it. They are likely to want to get the control back, get the shares back into the business and possibly go on to recruit someone who can fill the position.
I ask clients, “if faced with this situation, would you have enough cash in the bank to be able to buy back the shares”. Most businesses in fairness, don’t have £50,000, £100,000, £250,000… I therefore ask “What would you do?”. Some say that they will go to the bank, and I have to point out. that a bank may not lend them money if the major shareholder has died.
When there is more than one shareholder in a business, I would always recommend that they consider taking out a life insurance policy. Policies don’t have to be expensive and I can help businesses to structure the policy so that if anything did happen, the remaining shareholder would have the money to buy the shares from the deceased’s estate.
If you, or anyone you know has not had the discussion about the implications of a shareholder dying, with an adviser or an accountant, then I am more than happy to have a chat for free and to provide you with your options.
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