Business protection - Partnerships, LLPs and sole traders - Introduction

People are critical in small businesses. If an owner or key employee dies or falls ill, the impact on the business can be huge.
Key facts
  • People are critical in small businesses.
  • Business protection lets owners plan for the unexpected by providing cover so that the business can keep running with minimal disruption.
  • A key person is someone whose death, critical illness or disability would have a serious effect on the future profits of the business. In any given business a number of people could be regarded as 'key' including the partners, members, senior employees or the owner.

The immediate concern will be to make sure the business can carry on running until a replacement can be found, or until the colleague comes back to work. Cashflow can become a major headache.

While sales may fall, expenditure continues and the business’s main priority will be to make sure that there’s enough cash to meet its outgoings.

Business protection lets owners plan for the unexpected by providing cover so that the business can keep running with minimal disruption.

For partnerships, there’s another aspect which is just as important but is often overlooked.

In most circumstances, a partner will leave their assets, including their interest in the business, to family members. Business protection allows the other partners to regain control of their business if one of them were to die.

For LLPs the existence of a membership agreement will be important. If there’s no agreement, the Limited Liability Partnership Act 2000 will dictate what happens. If a member dies and their interest passes to someone else, the other person will be entitled to receive anything that would have been due to the member.

Business protection addresses issues such as:

  • What is the true value of the business?
  • Should the value include any goodwill?
  • Where will the remaining owners find funds to buy the interest?
  • If they can’t buy the interest, will the family or third party be entitled to a share of profits?

On the other hand, the family of the deceased will have different concerns. They’ll want to know:

  • How can they make sure they get a fair value for the interest in the business?
  • How long will it take for the other partners or members to buy out their share?

These issues don’t just arise if someone dies. If a partner or member suffers a critical illness, they may well decide to retire and will look to receive a fair value for their interest.

A partnership or membership protection scheme can easily resolve problems like this by providing:

  1. An agreement setting out how interests in the business should be valued and allowing the remaining partners or members the right to buy someone’s interest.
  2. The funds to buy the interest.

Partnership or membership protection and key person protection are often confused. It’s important to establish why the cover is needed to make sure the proceeds fall into the right hands. 

Note

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

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Last updated: 24 Jun 2019

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.