Business Assurance

Provide your business with confidence in a controlled environment, with improved efficiency of business processes, while maintaining reasonable assurances that you're in control of your  business in light of future events.

BUY AND SELL AGREEMENT 

As a business owner, you’ve invested a substantial amount of time, effort, and capital into establishing, maintaining, and making a success of your business. But have you invested any thought into what would become of your business should you suffer an unexpected disability or even death? Often business owners are too preoccupied with the day-to-day running of their companies to consider the future of their most important asset – the business itself. And in the absence of any long-term planning, the business they have worked so hard to build could suffer serious strain and the burden of insurmountable financial problems. Consider the implications to your business should you, as a co-owner, be unable to fulfil your responsibilities due to disability or death. Without any contingency plans in place, your interests in the business will be distributed according to your will, usually to your spouse or dependents. How will your co-owner/s feel? Will your dependents have the necessary skills, expertise, and experience to take over your role? Will they even want to? And just how secure will your family’s financial future be? This is where the Buy and Sell Agreement comes in – a way for you to protect both your business and your family while ensuring the orderly transfer of ownership, in the event of your death or disability.


  • WHAT IS A BUY AND SELL AGREEMENT?

    A Buy and Sell Agreement is a legal contract that ensures the continued operation of your business, with as little disruption as possible for the surviving owners. Under the terms of this legally binding agreement, the surviving owners are obligated to buy your interests in the business, while your estate is obligated to sell them. This ensures continuity of ownership for the surviving co-owner/s, as well as a fair market value for the business interests on the part of your estate. In this way, both the future of your business and your family is assured.

  • FUNDING A BUY AND SELL AGREEMENT


    A Buy and Sell Agreement is essentially made up of two components: 

    It outlines what will happen to you and your co-owner/s’ interests in the business, should certainly events, such as disability or death occur. In terms of the agreement in the event of any of the owners becoming disabled or dying, the surviving owner/s.


    It outlines how the money will be raised to finance the transfer of ownership and any associated costs. There are many ways in which to fund a Buy and Sell Agreement, but by far the most cost-effective and efficient way in which to do so is by purchasing life insurance.


  • STRUCTURING A BUY AND SELL AGREEMENT

    When it comes to structuring a Buy and Sell Agreement, there are a certain step that need to be follow 

    You and your co-owner/s will need to enter into a legally binding agreement with each other. 

    The current value of your business will need to be assessed by your company’s auditors or accountants. 

    Once your business has been valued, you and your co-owner/s will need to take out life insurance policies (with disability cover) on each other’s lives, to that same value. 

    Your life insurance policy is what will provide the immediate, necessary funding for the purchase of your interests in the business, in the event of your death or disability.

  • WHAT ARE THE BENEFITS OF A BUY AND SELL AGREEMENT?

    For the surviving owners: 

    The security of knowing that your business interests will not automatically pass to the heirs of your estate. 

    The knowledge that the management of the business will be left in competent hands, with no interference from your spouse, dependents, or any other heirs. 

     A reduced risk of ownership disputes. 

    The guaranteed payment of the purchase price of your business interests. 

    For your spouse and dependents: 

    Certainty regarding the funding of the purchase price, as well as the sale of your interests in the business. 

    A cash lump sum in exchange for your interests in the business, contributing significantly to their financial security. 

    Peace of mind knowing that ownership has been transferred to your co-owner/s without any involvement needed on their part.

INCOME TAX


In terms of the typical buy and sell structure where the individual owners own the policies on the lives of the other co-owners, the premiums are not tax-deductible, and the proceeds will pay out tax free in terms of current income tax legislation.




CAPITAL GAINS TAX 

As the policy proceeds will pay out to the original policyholders there will not be any capital gains tax consequences in respect of the policy. Any outright cession of a pure risk policy will not have any capital gains tax consequences for the policy. 

Please also note that the sale of the interest in the business is a disposal for purposes of capital gains tax. 


ESTATE DUTY 

Estate duty is currently 20% and is levied on the net value of the estate exceeding R3.5 million.

In terms of the Estate Duty Act, policies on the life of the deceased owned by a third party are deemed property in the deceased’s estate. This means that the proceeds of a policy on the life of a deceased may attract estate duty, irrespective of who the owner of the policy is.

There are, however, several exceptions, for example where policies are taken out for the purposes of a correctly structured buy and sell agreement. Provided that a policy meets the requirements of section 3(3)(a)(iA) of the Estate Duty Act, it will not be deemed property in the estate of the deceased and therefore not attract estate duty if: 

  • the policy is taken out or acquired by a person who, on the date of the death of the deceased, was a partner of the deceased, or held a share or like interest in a company in which the deceased, on that date, held a share or like interest, 
  • and the policy was affected with the purpose of acquiring the deceased’s interest in the partnership, or with the purpose of acquiring the whole or a part of the deceased’s share or like interest in the company or close corporation and any claim by the deceased against the company or close corporation, and 
  • no premium on the policy was paid or borne by the deceased. 

This estate duty concession is not available if a business is the owner of the policy because the person who acquires the policy must be a fellow partner, member, or shareholder. Similarly, the concession won’t apply with an employee buy-out structure. 


CONCLUSION 

As you can see, there are many benefits to entering a Buy and Sell Agreement with your co-owners, not the least of which is protecting the future of your business and securing the future of your family. Live for today, but plan for tomorrow. A Buy and Sell Agreement will help you to do both. Please consult your legal advisor to ensure that the buy and sell agreement is structured correctly from a legal and tax point of view


CONTINGENT LIABILITY INSURANCE 

As a business owner, there are many reasons why you may stand surety for a loan. Perhaps your business is new, and you need to borrow money to cover any start-up costs. Maybe you need to sign surety for any contracts or purchase agreements. Or possibly you are acting as the guarantor for a personal or business loan. 

Whatever the reason, once you stand surety for a loan, you become responsible for its settlement in the event of default payment by the business. In the event of your death the creditor has the right to claim the outstanding amount from your estate which could have severe consequences for your family or even the business. 

This is the role of Contingent Liability Insurance – to cover the outstanding amounts of any loans you may be standing surety for, thereby ensuring that your business and your family will not be affected by your death or disability. Because the loan of the business will be settled the suretyship against your estate can be cancelled. 




CONCLUSION 


Looking to financial institutions for business loans and funding is often necessary to ensure a successful future for your company. But how secure is that future should you not have the ability to repay your debt? Contingency Liability Insurance is one of the most efficient ways of protecting the financial future of your business and your estate, while giving your family peace of mind when they need it most. 

Please consult your legal advisor to ensure that the Contingent Liability Insurance is structured correctly from a legal and tax point of view.


  • WHAT IS CONTINGENT LIABILITY INSURANCE?

    the loan in question. As the life assured, if you were to suffer an extreme illness, injury or death, the life insurance policy would pay out a lump sum to your company to settle the loan amount/s in full.

    In this way, your business would be protected against contingent liability, the outstanding loan of the business would be paid immediately, and your estate would be released from any potential liability. 

  • BENEFITS OF CONTINGENT LIABILITY INSURANCE

    Anyone in your business who co-signs as a surety for contracts, lease agreements or loan applications of the business should be covered under a Contingent Liability Insurance policy, due to the very real benefits this business cover provides: 

    The financial resources of your business will not be put under strain. 

    Your business will not incur any additional tax burden. 

    Any surplus proceeds from the policy pay-out can be retained by your business. 

    The policy values can be reflected as an asset in your business. 

    The liquidity of your business will not be affected. 

  • INCOME TAX IMPLICATIONS

    INCOME TAX IMPLICATIONS 

    In terms of sec. 11(w)(ii) of the Income Tax Act an employer or company may deduct the paid premiums of a policy on the life of an employee or director from the income of the business, if the policy complies with all the following conditions: 

    The employer/company is insured against any loss by reason of the death, disablement, or severe illness of the employee/director. 

    The policy is a risk policy with no cash or surrender value. 

    The policy is not owned by a person other than the employer company at the time of payment of the premium. 

    In respect of a policy entered into on or after 1 March 2012 the policy agreement states that this paragraph applies in respect of premiums payable under the policy; or before 1 March 2012, it is stated in an addendum to the policy agreement by no later than 31 August 2012 that this paragraph applies in respect of premiums payable under the policy. 

    As indicated above a requirement for the premiums to be tax deductible in terms of sec. 11(w)(ii) of the Income Tax Act is that the company/ employer must be insured against any loss by reason of the illness, injury, or death of an employee/director. 

    In the case of a contingent liability plan the company/employer is not insured against a loss, but the objective is to settle a debt. (SARS) has therefore indicated that the premiums will not qualify for a tax deduction and the policy must therefore be issued as such. The proceeds of the policy will pay out free from income tax. 

  • ESTATE DUTY IMPLICATIONS

    Estate duty is currently 20% and is levied on the net value of the estate exceeding R3.5 million. 

    In terms of the Estate Duty Act, policies on the life of the deceased owned by a third party are deemed property in their estate. This means that the proceeds of a policy on the life of a deceased may attract estate duty, irrespective of who the owner of the policy is. 

    There are several exceptions, for instance where a business takes out a policy on the life on an employee (key person), the proceeds will not attract estate duty, provided the requirements in section 3(3)(a)(ii) of the Estate Duty Act are met. 

Keyman Cover

As a business owner protecting your assets is of the utmost importance. You may have taken out policies such as public liability insurance, professional indemnity insurance, and even legal cost insurance to help safeguard you and your business from damage or threat, and to ensure the continuity of the company you have worked so hard to build. 

But even with all these policies and procedures in place, have you stopped to consider the impact on your business should you suddenly lose the experience and expertise of a valued employee? Would your business be able to survive, or would you lose time, money and perhaps the business itself trying to replace such an invaluable asset? 

The solution to this potentially devastating situation is Keyman Cover – one of the most overlooked business insurance policies, yet one of the most vital as well. 


  • WHAT IS KEYMAN COVER?

    Keyman (or Key Person) Cover is an insurance policy that helps to absorb and minimise any disruption to your business in the event of the death or disability of your business key person. This could be a partner, a board member, director, salesperson, an employee with specialist skills and knowledge, or even you as a business owner. 

    As a form of corporate-owned insurance, Keyman Cover is most often favoured by both large companies and smaller partnerships, it provides financial protection against the loss of revenue, profits, and the capital value of a business, should a key person suffer a major illness, injury or even death.

  • HOW DOES KEYMAN COVER WORK?

    Essentially, a Keyman Cover insurance policy is owned and paid for by the company itself, meaning that any pay-out of the policy would go directly to the company. In this way, the policy is designed to pay out a lump sum to the business in the event of the key person’s illness, injury, or death. 

  • WHY IS KEYMAN COVER IMPORTANT?

    Having Keyman Cover in place can help to protect your business from a series of potentially disastrous consequences, such as:

    Financial losses to your business, including profits and sales.

    The loss of important personal and business contacts.

    The loss of integral specialist knowledge and experience.

    Loss of time while finding a suitable replacement or upskilling one from your current staff pool.

    An increased workload for staff in the interim. 

    A possible change to the nature or way you do business. 

    And in the worst-case scenario, the closing of your business itself. 

  • WHAT ARE THE BENEFITS OF KEYMAN COVER?

    While not having Keyman Cover in place could ultimately prove damaging to your business, there are several additional benefits that come from protecting your most valuable human capital: 

    Necessary funds for the recruitment, training, and development of new employees.

    Immediate cash for the repayment of any loans made to your business by the key person.

    The protection of the continued existence and growth of your business. 

    The continued reputation and creditworthiness of your business. 

  • STRUCTURING KEYMAN COVER

    To effect Keyman Cover, there are several steps that first need to be taken: 

    The financial value of your key person will first need to be established. This can be done through multiplying their salary, judging the number of years it would take for a replacement to reach their level of expertise, or itemising the cost of replacing the key person. 


    Once the financial value of the key person has been determined, you will need to take out a life insurance policy against their life, with disability and severe illness cover included. This policy will need to be able to cover the financial loss of the key person suffering an illness, injury, or death. 


    All the relevant documents will then need to be completed and signed, making the policy official. 

  • INCOME TAX IMPLICATIONS

    You have the following choices regarding your premiums and can choose whether: 

    Premiums are tax-deductible and the proceeds are taxable or 

    Premiums are not tax-deductible, and the proceeds are tax free.

     Should you want the premiums to be tax-deductible, the proceeds will be taxed and it is therefore prudent to increase the cover amount so that the after-tax proceeds are enough to cover your needs. 

    Requirements for the premiums to be tax-deductible. 

    In terms of sec. 11(w)(ii) of the Income Tax Act an employer or company may deduct the paid premiums of a policy on the life of an employee or director from the income of the business, if the policy complies with all the following conditions: 

    The employer/company is insured against any loss by reason of the illness, injury, or death of the employee/director. 

    The policy is a risk policy with no cash or surrender value.

    The policy is not owned by a person other than the employer/ company at the time of payment of the premium. 

    In respect of a policy entered into on or after 1 March 2012 the policy agreement states that this paragraph applies in respect of premiums payable under the policy; or before 1 March 2012, it is stated in an addendum to the policy agreements by no later than 31 August 2012 that this paragraph applies in respect of premiums payable under the policy. 

  • ESTATE DUTY IMPLICATIONS

    Estate duty is currently 20% and is levied on the net value of the estate exceeding R3.5 million.

    In terms of the Estate Duty Act, policies on the life of the deceased owned by a third party are deemed property in their estate. This means that the proceeds of a policy on the life of a deceased may attract estate duty, irrespective of who the owner of the policy is. 

    There are several exceptions, for instance where a business takes out a policy on the life on an employee (key person), the proceeds will not attract estate duty, provided the requirements in section 3(3)(a)(ii) of the Estate Duty Act are met. 

  • REQUIREMENTS FOR ESTATE DUTY NOT TO APPLY

    The policy must not be affected by or at the insistence of the deceased. 

    No premium on the policy must be paid or be borne by the deceased. 

    No amount payable and recoverable in terms of the policy may: 

    be paid or will be paid to the deceased’s estate, and 

    be paid or will be paid to or used to the benefit of: 

    one of the deceased’s family members, 

    any person who depends wholly or partially on the, 

    deceased for maintenance, 

    any company that has ever been a family company in relation to the deceased. 

    A “family company” is any company that the deceased, or the deceased and their relatives collectively, controlled or could control directly or indirectly through: 

    a majority shareholding or, 

    any other interest therein or, 

    any other manner whatsoever. 

    A “Company” for the purposes of the above definition includes close corporations and private companies, but excluding companies listed on a recognised stock exchange. 

    A “relative” of a deceased (as defined in the Estate Duty Act) is the spouse of the deceased or any person within the third degree of blood relation or any spouse of such a relative, as well as adopted children.

    Although estate duty will be levied on the proceeds if the requirements of section 3(3)(a)(ii) are not met, the proceeds that will be subject to estate duty will be reduced by the premiums paid by the business plus compound interest of 6% per annum. The business, as the policyholder, will be liable to refund the estate for any estate duty payable. Should estate duty apply in your case, you would need to increase the cover amount so that the after-tax proceeds are enough to cover your needs. 


CONCLUSION

Physical assets are important to a business, but when one considers the impact that a loss of intellectual assets could have on the future of a company, protecting expertise becomes just as, if not more important. Make sure that every part of your business is protected against the unexpected with Keyman Cover. 

Please consult your legal advisor to ensure that the Keyman Cover is structured correctly from a legal and tax point of view.