Have you considered what might happen to the control and future ownership of the business if one of the partners or shareholders should die or become seriously disabled?
Do you want to be in control of who you are in business with?
How important is it that your estate and dependants receive a fair price for your shares or business interest?
Appropriate Shareholder Protection can create the cash required in the unexpected death or serious disablement of a partner or shareholder, to enable the purchase of their shares or business interest. This avoids using personal cash reserves, the sale of personal assets or a substantial loan at a time of uncertainty.
A Buy/Sell Agreement is a written contract between business owners. It sets out what would be done to their business interests should they die, become disabled, suffer a critical illness, resign or retire.
The second part of the Agreement outlines how the succession plan will be funded. Insurance policies and/or savings could be used to fund any obligations.
Legal advice on the Buy/Sell Agreement and related documents should be obtained, as specific circumstances vary.
Ownership of Shares
The three different ways of owning the company shares are:
|Individuals:||If the shares are owned by the individual shareholders of the company then a “Buy/Sell Agreement” should be in force. This may have an agreed value on the shares of the company and can be binding, i.e. must sell, must buy.|
|Trust:||The shares of the company may be owned by the individual’s personal trust. Trustees have the overriding duty to obtain the best price they can for the beneficiaries. If the shares are owned in this manner the best practice is to have a “Buy/Sell Agreement” to guide the trustee in the wishes of the partners of the company.|
|Company:||If the shares are bought by the company, a key issue may arise if the company receives funds and on-loans it to shareholders, it may result in Fringe Benefit Tax, unless a company charges commercial interest rates. If a company intends to buy back its own shares it could have the effect of diminishing the value of company to the shareholders, it must also pass the Solvency Test.|
DISCLAIMER: AIA New Zealand has made all reasonable efforts to ensure that the information in this guide is correct as at the date of printing. This guide is provided by way of general information only and is not to be relied upon as a substitute for obtaining professional advice on the specific circumstances of the individual or business.