There is a growing need to think more carefully about your personal affairs.
The UK’s technology sector is thriving. According to analysis by the accounting and audit firm RSM, the number of start-ups jumped by almost 60 per cent last year.
However, with more entrepreneurs on the path to success, there is a growing need for them to think more carefully about their personal affairs.
Understandably, founders of a business in the early stages are focused solely on their commercial objectives, securing funding and achieving growth. Too often this means they forget about putting measures in place to protect their assets, business and family, increasing risks and potential costs further down the line.
So, if you’re an entrepreneur seeking to build your business, but still haven’t got your house in order, here are our top tips:
Protect your personal assets through your commercial documents
Nobody wants to think about death or a marriage breakdown, especially when they’re starting a business, but it’s important to do this at the earliest opportunity.
This is a conversation that’s best had when you’re setting up your company so that wording to protect your personal position can be weaved into your commercial documents.
In the articles of association, there is usually provision for what will happen to shares in certain circumstances, including on death. However, despite the UK having a 40 per cent divorce rate, it is rare for these agreements to state what will happen if the founder suffers a relationship breakdown.
Work with your legal team to address this. For example, entrepreneurs are often advised by accountants to gift shares to their spouse for tax reasons, but that thinking is rarely developed to look at what would then happen to those shares should the couple split up. Commercially, this can prove problematic, particularly when shares carry voting rights, so you must put measures in place to ensure that such shares automatically revert back to you if you go through a divorce at a later stage.
It is also possible to put pre-emption rights into the governing documents so that any shares are offered to the other shareholders, members, or partners in the business. This can be done in conjunction with a ‘keyman’ insurance policy which pays out to the other shareholders, members or partners in the business, allowing them to purchase the shares from your estate.
Safeguard assets for your children
If you want to buy property for your children or put money away for them, there are steps you can take to protect these assets to ensure they stay within the family if their relationship breaks down.
Gifts in your Will could be made contingent upon the children attaining a certain age or better still, left to a trust managed by the family so they do not actually own the physical assets. Instead these are protected within a family trust wrapper.
Lifetime gifts (such as a cash gift to buy a house or use as a deposit) can also be made as a way to reduce your inheritance tax liability. Such a gift could be made on the proviso that a child enters a pre-nuptial or cohabitation agreement. Alternatively, a trust could be used to protect the cash.
It’s understandable that entrepreneurs don’t always have these aspects of their lives in order. At the start-up stage, cash is often tight and spending money on lawyers to protect assets that may not be worth much at that point may feel unnecessary or unaffordable. However, don’t be tempted to cut corners or leave it too late when putting legal documentation in place to protect your personal affairs.
In the early stages, a basic Will, together with a joined-up approach in the corporate governance documents will usually suffice. Although the temptation is to think “job done”, once you have assets worth £500,000 or more, it is likely that you will need something more detailed to ensure you’re adequately protected.
The key is to review your Will every five to seven years to make sure that it still meets your needs and is inheritance tax efficient, which can be advised by a lawyer. If your personal circumstances change and your wealth has grown, if you’ve acquired more assets or exited the business for example, then an annual review is recommended.
If you’re considering a pre-nuptial agreement, allow time for this to be prepared to fit your individual circumstances. There isn’t simply a template that you can use to complete this important document. It should be tailored specifically to your needs now and in the future. With this in mind, aim to complete the agreement at least six months before the wedding.
Get specialist, local advice if you have assets abroad
If you’re thinking about buying assets aboard, make sure you understand how these would be affected by death or divorce. A UK-based lawyer specialising in international cases will have a good network of specialists in other jurisdictions and will work with you to ensure that your wishes can be carried out both at home and abroad.
Make informed decisions
Money will be tight when you’re starting a business and you may not think you have much to protect in terms of assets, but you must still take action, so you are prepared for what could happen in the future.
Your legal team should make you aware of all risks and options related to your personal wealth, so you can make informed decisions. Ultimately, it’s up to you how much protection you put in place and when, but whatever you decide, it’s advisable to seek regular guidance from a specialist lawyer, particularly as your business grows and personal circumstances change.
Taylor Vinters supports the innovators and entrepreneurs behind businesses. For further advice on protecting your private wealth, please contact Jackie Wells in our family and matrimonial team or Jocelyn Fox in our entrepreneurial wealth team.