How to avoid threats to your business

You can take positive steps to protect the value of your business against the perils of divorce, death, tax and an unexpected lack of capacity to manage your affairs yourself, says Jonathan Riley.

Regardless of the state of the economy, all business owners should make sure they have adequate safeguards in place to protect their business. If not, now may be a good time for you to review your current levels of protection. Some key points to bear in mind are set out below.

Protecting assets from divorce
Economic difficulty often leads to an increase in divorce. As an owner, the value of your business would usually be taken into account if you divorced. There are likely to be steps you can take to shield a business from claims of a divorcing spouse (provided this is considered early enough). Similarly, if you hope to introduce your children into the business, there are ways to protect it against their marriage ending too. Business continuity is one of the keys to a business's success; this continuity can be preserved by putting in place procedures and safeguards against these future claims.

Keeping the business in the family
Recent research suggests that 49% of firms have no business succession plan in place. Given the effort taken to build most businesses and the poor rates at which businesses successfully survive generational change, this seems surprising.

There are typically two elements to succession: management and ownership.  As a general principle, succession to ownership, to control and to entitlement to income from a business should be treated as a gradual process rather than an 'event': any arrangements should not only be clear, simple and fair, but also retain the flexibility to adapt as circumstances change. Succession to a family business should be considered hand-in-hand with other aspects of asset protection (divorce has been mentioned above) to ensure the value created in a business is not only preserved but is enhanced for the benefit of future generations.

Understanding tax opportunities
Following the death of a business owner, the value of the business will potentially be subject to inheritance tax (IHT) at the rate of 40%. For IHT purposes, a business will be either a 'trading' business (for example, a children's leisure park) or an 'investment' business (for example, a business which lets out property long term). The difference is significant because businesses that are 'trading' businesses can potentially benefit from 100% relief from IHT (and may also be able to minimise their liability to capital gains tax).  It is easy to unintentionally fall outside the definition of a 'trading' business and you should be clear as to where your business falls and how to maximise the reliefs available. Even if your business is an 'investment' business all is not lost - steps can still be taken to minimise IHT in a way which is also capital gains tax efficient. The key is to understand the opportunities as early as possible rather than waiting until retirement!

Lasting Powers of Attorney
A Lasting Power of Attorney (LPA) is a document under which you can appoint someone (or a number of people) to take certain decisions on your behalf. LPAs replaced Enduring Powers of Attorney (EPAs) in October 2007, although all EPAs correctly executed on or before 30 September 2007 remain valid. Significantly an appointment under an LPA will continue if you lose the mental capacity to take decisions yourself (the appointment of an attorney under an ordinary power of attorney will not). For this reason entering into an LPA is viewed as an important part of protecting your business as well as personal interests.

A properly drafted LPA can ensure business continuity is maintained if you lose the capacity to manage your business yourself. For example, under a property and affairs LPA you can appoint an attorney to exercise the voting rights attaching to your shares in a business if you are unable to do so yourself.

If you do not have an EPA or LPA in place and you lose mental capacity, an application to court would need to be made to appoint someone to deal with your affairs. There are two reasons why this is a disadvantage: (a) you will not be able to chose who would be appointed to deal with the various matters on your behalf; and (b) there can often be a significant delay in a court making the appointment. If at the time you are selling a business, a house, have a loan outstanding or have financial commitments that need to be met, this delay can prove costly.

Jonathan Riley is head of Michelmores' Families in Business team. To discuss the steps which can be taken to preserve the value of your business, contact Jonathan at: jonathan.riley@michelmores.com.