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In business set up the focus is generally on getting the business up and running. Getting orders, making money, sorting out bank accounts etc etc. In the rush and excitement of getting this done it is very easy to forget about some very important fundamentals. Director share Agreements and Partnership Agreements.

Director Share Agreements

This is a legal document which maps out what will happen financially in the event of certain circumstances - usually death of a Director or serious or critical illness.

Without such an agreement, on the death of a Director his/her shares revert to the estate. It is clearly in the interest of the company for these shares to be bought back into the company so that control is retained. But how can this be done? How are the shares to be valued? Does the company have the cash? Does the estate want to sell? With the correct agreement in place all of these questions are answered and, if the agreement is accompanied with a life policy and a cross option agreement then there will be funds available and a no fuss transfer of share ownership. Whats the alternative...........no cash to buy the shares and hey welcome to your new director...the son of the deceased he may have been flipping burgers last week but hes a fast learner!

Partnership Agreement

A partnership agreement should lay down what would happen in a series of eventualities such as what happens on death or illness. If your partner suffers long term illness, should he continue to draw - he might think so . But what about his fit partner?. He is now shouldering all the work and responsibility and stress whilst his mate is at home, still being paid. How long can this go on for? You see the problems.

What if a partner dies? How much is their share worth and can you pay their estate? This should all be documented in the partnership agreement. What happens if you havnt got one? Well the law is very clear - there is a default position contained in the PARTNERSHIP ACT.

This Act states that on death of a Partner the value of his share is calculated (simply) as this:

What income did the business provide for the deceased?

What investment would need to be made to recreate this income?

That is the value of the estate.

So the argument that "The stock is only worth so much" or "The assets are only ££££" doesnt wash. That money must be found - even if it means selling your house, your car, your telly to raise it. "But that leaves me with nothing, what about my share?" I hear you cry. Dosent matter. If you have no agreement then the default position stands.

I hope I have your attention!

Every Partnership should have a Partnership agreement drawn up along with the appropriate life policy and cross option agreement.

Let me give you a real life example. No names no pack drill.

I was working for a major high street bank many years ago. On the books we had a partnership made up of 3 partners. They where in the boat building business and doing very well. They had no agreement.

Partner A died suddenly at the age of 43.

What they didnt know was that Partners A's wife was having an affair.

With their competitor.

They had no agreement or cash to buy out the deceased Partner.

The deceased's wife had no business experience so she didnt feel comfortable taking her late husbands place in the business so she asked someone to act on her behalf.

Sorry boys but welcome to your new partner - your competitor!

A simple agreement and a life policy would have meant they recieved a tax free lump sum with which to buy out the deceased partner.

If you want to talk to me to see how either Director share Purchase or a Partnership agreement would benefit your business then please call me or email me stuart@willowgate.wanadoo.co.uk

I would just like to say that where I have written "he" please read "he/she" and that my use of the term "flipping Burgers" is not meant to be derogatory to burger flippers.

Posted By Stuart Brewer of Woolstonespa Ltd

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