What is Shareholder Protection?
Shareholder Protection provides cover if a business owner becomes permanently disabled or dies. Essentially, each shareholder is insured for the value of their shares. If they are forced to exit the company due to death or disability, there is money available for the other shareholders to ‘buy out’ the shares.
Why do I need Shareholder Protection?
Without Shareholder Protection cover, if something happens to one of the shareholders in your company, you may have no choice who you end up being in business with… for example:
- your business partner’s wife
- your business partner’s lawyer or accountant
- your business partner’s wife’s brother.
When do I need Shareholder Protection?
It is worthwhile considering Shareholder Protection cover if there is more than one shareholder and your company has a dollar value. Essentially, if you cannot afford to ‘buy out’ a shareholders shares immediately, you need to consider Shareholder Protection cover.
When is Shareholder Protection not required?
If you are a sole trader (i.e. you have no shareholders) or if you run your business with your spouse. In both cases, if something were to happen to you, your shares would go to your estate. Also, if you have a relatively new company or your company has no capital value then you don’t require Shareholder Protection just yet… but it is worth understanding how it works so that you can determine when you need to consider cover in the future.
What is a Buy/Sell Agreement?
It is important that you review your current buy/sell agreement or put one in place when you take out Shareholder Protection cover as it sets out the ground rules of what happens if a shareholder dies or is taken out of the business. It specifies when the shares need to be sold, who will purchase them and in what timeframe.
A buy/sell agreement is just as important as the insurance… one without the other is useless.