Starting and building a business is a challenging and exciting time, working alongside people who share your vision of what the company can be, and do. Your drive and determination is focused on business success, as it should be, but protecting the assets coming from that success should be in the back of your mind too.
Time to plan ahead
Once you have time to draw breath, ensure you make time to plan ahead for major changes; these often come out of the blue and if you have the right safeguards in place, your business will continue to support you, your partners and your families. These bolts from the blue could be connected with partners or shareholders, perhaps because their priorities change over time and they are no longer able to give as much input, so ask yourself if your company structure is robust enough to cope. How can you separate without wrecking the business?
Get the right insurance in place
Or it could be because a partner or major shareholder dies or becomes unable to work. How will you feel about part of your business being owned by someone who contributes nothing to it? The answer could be to take out life or critical illness insurance, which can pay out cash to the company to enable it to buy the shares of the deceased or person who cannot work; this gives them cash to live on and the company can continue without increased debt. You should also think about, when you consider a partnership or shareholders’ agreement, controlling how shares can be transferred – we have all heard horror stories about shares ending up with someone who only wants to asset strip, and the fallout is massive.
You can also act to protect against someone who uses the company like their own personal piggy bank. By placing controls on activities within the firm and creating agreements which penalise that kind of behaviour you can mitigate against such abuse. Additionally, by putting restrictions on what partners do when they leave means you can avoid them setting up a rival firm and taking customers with them.
Keep an eye on tax
Many people make the very understandable decision to give shares to their non-working spouse – after all, you trust them and it will save some tax. But if you want to sell, or if your relationship disintegrates, that advantage will be lost; there are other more tax efficient options.
Think too about shares and employees – options are attractive in some cases but you need to consider how to use them most tax efficiently and safely; you don’t want shares dispersed when employees leave, but you might want to use them to drive the right behaviours.
All of these safeguards and choices can be reviewed as your business grows and changes – it makes much more sense to do that than be forced to call the lawyers in when a crisis hits you. Make sure what you have in place is fit for purpose, works for everyone involved and protect what you have all built up.