Two of the most common forms of business structure are:
- The partnership between two or more people; and
- The proprietary limited company with two or more shareholders.
Each partner or shareholder's interest in the business will, on the death of the partner or shareholder, form part of the estate and, in most cases, pass to his or her spouse or children.
Basically there are five possibilities as to what will happen to the business in such a situation. These are:
- The business could be wound up.
- The heirs of the deceased could take that person's place in the business.
- The heirs of the deceased could sell their interest to an outsider.
- The surviving partners/shareholders could sell their interest in the business to the heirs of the deceased.
- The surviving partners/shareholders could buy the deceased's interest from the heirs and continue with the business.
The most favoured of these possibilities or options is currently the last-mentioned, and partnership and shareholder insurance is designed to provide the finances needed to enable this action to be taken. To ensure that the deceased's interest is sold to the surviving partners/shareholders, it is necessary to have a formal agreement drawn up by their legal advisers (known as a buy/sell agreement).
The best way of guaranteeing that a set sum of money will be available at an unknown future time is to effect life insurance. Therefore, taking out life insurance in conjunction with a buy and sell option agreement is normally the only way in which the partner/shareholder can be sure of having the necessary cash to buy out a deceased partner's share.
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