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The Importance of Financial Advice
Limited Companies
Having chosen to run a business via the medium of a Limited Company, aside from obviously striving to be successful, there are endless different matters that will be encountered and make demands on time. Amongst these are the many financial planning issues, both on a personal level and as an partner you need to take the time to plan.
Nearly always, those individuals that run successful businesses find that time is precious and time can be very limited. When striving to be effective and profitable, setting time aside to broach financial planning issues is often put lower down the list of daily priorities.
Understand the cost of poor planning; benefits of good planning, failing to set aside the time or financial resource is often a false economy. We regularly encounter clients that continue to pay premiums to unnecessary or uncompetitive insurances or invest into products that deliver subpar performance.
However, those same clients would be reluctant to allow a poorly performing employee or inefficiencies in their business model to reduce productivity or have a negative impact on profit. Whilst proprietors are very focused on the day to day activities of their business, the need to address financial planning should be considered an equally important part of their business plan.
Contact Gow's for a full review of your business needs
Debt protection
This is often effected upon the instruction of the bank with a view to covering overdrafts and commercial loans.
Shareholder protection
With appropriate legal assistance, decisions should be made regarding the basis of valuation of the shares of the business and on how the Company would be restructured in the event of the death, ill health or retirement of one of the shareholders. This would usually be contained within a director agreement, which also contains provisions for how the company is run, and obligations of each individual director.
In regards to the death of one of the shareholders, provision should be effected to either: -
compensate the deceased’s estate for the loss of the shares if these are cancelled or
absorbed by the business,
or
where these fall into the deceased’s estate, to enable the remaining shareholders to
purchase the shares.
In the case of the latter, a cross option agreement (also known as a double option agreement),
rather than a buy & sell agreement, should be effected. This is worth considering, as the former
does not constitute a binding contract for sale. Because of this, any Inheritance Tax Business
Property Relief is protected. An option to sell the deceased’s shares is granted to the executors
and an option to purchase the shares is given to the remaining shareholders. Either side may
exercise the option, which is then binding on the other party.
The purchase can obviously be financed either by self-funding out of company assets or cashflow,
or by raising debt. If either of these are not viable or preferable, a highly cost effective alternative is
to effect life assurance in respect of each shareholder.
Effective planning in this area avoids shares being sold to external parties or a spouse or partner
of the deceased being able to participate in the running of a business.
In conclusion, the key benefits of a share protection arrangement are certainty and control.
Certainty comes from knowing that the business can finance a prospective purchase and that the
business can survive the death of a shareholder. Control is provided as the surviving shareholders
can decide who they continue to run their business with.
Key person cover
Key person insurance is effected where the long-term absence through accident or ill health, or death of an individual, will have a severe detrimental effect on the profits of the business. It is effected to cover the cost of replacing the intellectual or physical skills that contribute to the success of the business and the financial impact the loss of such skills would create. Clearly such cover may be considered for sole traders, as they are the founders of a business and are often in essence ‘what make the business tick’.
As the situation arises, key employees should be protected, to provide the business ‘breathing
space’ and the ability to endure the downturn in profits that could ensue. This allows time to seek
out the right replacement and to cover recruitment costs, which alone can be quite high.
Group risk
a key constituent to the growth or prosperity of a business is the employees. In order to attract and retain good staff, provisions such as sick pay entitlement, death in service (life cover), private medical insurance (PMI) and critical illness are appropriate as part of a voluntary or standard employee benefit package. These can of course be self-insured, although this may not be desirable as this can leave the employer exposed to a substantial liability. Therefore, it maybe preferable to insure and provide the benefits by way of group risk arrangements.
Stakeholder Pension
As with employee protection provision, a key benefit to attracting or retaining good quality
employees is an appropriate pension arrangement.
Whether an employer chooses to fund it or otherwise, a minimum requirement where the number
of employees, including directors and part timers, is 5 or more is to provide access to a
Stakeholder scheme.
Failure to ‘designate’ a registered Stakeholder scheme when required to do
so could lead to financial penalties of up to £50,000 for the Company and fines of up to £5,000 on
individuals i.e. directors.
Certain employers will be exempt from such a requirement if they offer an occupational pension
scheme or a group personal pension that meets certain conditions.
Self-Invested Personal Pension (SIPP)
SIPPs give savers the opportunity of incorporating funds managed by different investment managers within one pension portfolio. This diversity is particularly attractive if you have a large fund and are considering using Pension Fund Withdrawal (PFW) products after retirement. With a SIPP, investments can essentially be segmented, using part for PFW with the balance being moved around at will.
A SIPP is a particularly useful vehicle if an individual or business wants to buy commercial property from which to carry out its business. Commercial property can be leased to a business. The rent paid to the fund is tax deductible and the fund receives the rent gross. Borrowing is also possible and banks will typically lend up to 70% of loan to value.
Small-Self Administered Pension Scheme (SASS)
A SSAS is an occupational pension scheme that can be used for a maximum of 11 members. One-member SSASs are popular arrangements with founding members of a business, owners and chief executives with 50% of the equity.
They are occupational schemes, but escape many of the investment restrictions of more conventional arrangements. In particular, a high degree of self-investment is permitted.
After an initial two years, plan holders can use up to 50% of their SSAS fund to invest in their own company. The fund can also make a loan to the company and purchase the business premises, leasing it back to the company on commercial terms.
Personal Accounts – the new workplace pension plan from 2012
Alongside these changes to the State Pension the government has proposed even more changes on top of these. In the same year that the capital is hosting the Olympics, a new model of pension saving is planned, called personal accounts. All employees aged 22 and over and earning more than £5,000 per year, who aren’t offered access to an employer pension arrangement, will be auto-enrolled into personal accounts in 2012. You do have the chance to opt out, should you wish. But if you don’t let your employer know that you have opted out, you will automatically join the scheme and pay 4% of your salary into it. Your employer will contribute 3% of your earnings, and an extra 1% from tax relief will be added in making a total of 8%.
So, if your employer doesn’t offer a pension scheme at present, they will have to offer personal accounts and it may be a good idea to stay opted in as you will receive employer contributions, a bit like a delayed pay rise. However, as some means-testing issues have yet to be ironed out with regards to personal accounts, it may be worth seeking financial advice about whether you should opt out or not.
Business Planning
Shareholder Protection
Key Man Cover
Debt protection
Group risk
Stakeholder
SIPP
SASS
Personal Planning
Life Assurance
Income Protection
Investments
Mortgage
Retirement Planning