A partnership can be an effective method of pooling resources and skills to the financial advantage of all concerned. However, it brings with it responsibilities and the possibility of financial burden, especially when one of the partners dies, retires, or becomes incapacitated. For a partner, his share in the business is likely to be his greatest financial asset, so he needs to take steps to protect it, not only for the benefit of his family but also for the benefit of the other partners to help ensure the continuation of the business. The directors of private limited companies are in a similar position.
In the event of the death of a partner, the business assets and the bank accounts will be frozen until the succession of the dead partner is established, and the other partners will also lest with no access to the bank account or assets of the company. What happens to the value of the business then? The value of the business diminishes considerably. This causes a huge loss to the existing partners as well as the dead partner’s family. It can cause immediate financial hardship for the remaining partners and maybe even a loss of control of the business. In essence, the death of a partner can potentially jeopardize the future of your business and can have major implications for the remaining partners.
The business protection needs for partnerships are twofold:
- Ensuring that, when a partner leaves through any cause, the remaining partners can continue the business, whilst maintaining control, and without undue financial strain.
- Ensuring that when a partner leaves the business, he or his family is adequately provided for. These problems may arise when a partner dies.
- Partnership protection ensures that upon the death of a business partner, a cash sum equal to the value of the deceased partner’s shares will be paid out to the remaining partner(s).
- The money can then be used to buy shares from the deceased partner’s family.
- For this, a legal framework* should be set up.
- A double option agreement enforces the sale of shares by either side – the family and the partner(s).
- This ensures the family is compensated fairly, and the remaining partners can continue to run the business with minimum disruption.