PARTNERSHIP
PROTECTION
A look at the differences between Partnership Protection and Shareholder Protection
Partnership protection and shareholder protection are both types of business ownership protection strategies, but they are tailored to different legal structures and business entities. Here's how they differ:
Legal Structure
Partnership Protection: Designed for partnerships, including limited liability partnerships (LLPs). In a partnership, the business is owned by two or more individuals who share profits and liabilities.
Shareholder Protection: Tailored for companies with a share structure, such as private limited companies (Ltd) or public limited companies (PLC). In these structures, ownership is represented by shares, and shareholders have specific rights and responsibilities.
Ownership Structure
Partnership Protection: Addresses the partnership interest of individual partners. Typically involves arrangements for the purchase of a deceased partner's share by the remaining partners or the partnership itself.
Shareholder Protection: Focuses on the shares owned by individual shareholders. In the event of a shareholder's death or critical illness, the protection plan facilitates the purchase of the deceased shareholder's shares by the surviving shareholders or the company itself.
Agreements
Partnership Protection: Involves a legal agreement, often known as a Partnership Protection or Cross-Option Agreement and often a single option agreement as well. These agreements outline the terms and conditions for the purchase and sale of partnership interests in the event of death or critical illness.
Shareholder Protection: Utilises a Shareholder Agreement or a specific provision within the Articles of Association. It may also use specific cross option agreements and single option agreements. These agreements outline the mechanisms for the transfer of shares in the event of a shareholder's death or critical illness.
Funding Mechanism
Partnership Protection: Often funded by life insurance policies on the lives of the individual partners. The payout from the insurance is used to buy the deceased partner's share from their estate.
Shareholder Protection: Similarly funded by life insurance policies, where the payout is used to facilitate the purchase of the deceased shareholder's shares.
Tax Implications
Partnership Protection: The tax treatment can vary depending on the structure of the partnership and the specific agreement in place.
Shareholder Protection: The use of life insurance for funding can have tax advantages, and the agreement is structured to comply with tax regulations, such as Business Property Relief.
Regulatory Considerations
Partnership Protection: Governed by partnership law, and the agreement should comply with legal requirements for partnerships.
Shareholder Protection: Governed by company law, and the agreement should align with the legal framework for companies, including compliance with the Companies Act 2006.
In summary, while both partnership protection and shareholder protection serve the purpose of facilitating the orderly transfer of business interests in the event of death or critical illness, they are tailored to the specific legal structures of partnerships and companies, respectively. It's crucial for businesses to choose the appropriate protection strategy based on their legal form and ownership structure.