Q I recently set up a company with a friend. We were both made redundant and went into business quite quickly and I now have a few concerns. What would happen if either of us were to pass away? I don't want to fall out with his family, or vice versa, should something like this happen. A Congratulations on setting up your new business. Redundancy is a difficult situation and it sounds like you and your friend have taken a positive step forward. I understand your concerns, as this is certainly an issue that needs to be addressed very early on in the life of the business – by you and your friend.

It would be a difficult situation should either of you pass away, particularly as you are friends, and no doubt the business would suffer due to the loss of key skills, contacts and reputation. However, it could be even worse if there is no clear plan in place for managing business affairs in the event of death, or serious illness, as this could also remove one of you from the business quite suddenly. By taking action now, you will be prepared for the worst. Think about the following:

1. Does the business have a will? All business owners or directors should consider making a 'business will'. This is a term used to describe business protection insurance and assurance products that manage the affairs of the business in the event of a director, partner or key shareholder passing away (or falling seriously ill).

2. What are the consequences of not having a will? If a business loses a partner or director due to death or illness, a major risk is that it will also lose their shares in the business. In a partnership, if one of the partners passes away, the partnership is dissolved and that partner's share becomes a debt of the business that must be paid off by the surviving partners. Similarly, the shares of a company director would pass to their next of kin and the surviving directors may find themselves in business with someone they don't know well or who does not care about the business.

3. What happens if there is a will? Business protection insurance can be used to cover the cost of paying the debt associated with a deceased partner's shareholding (making a payment to the estate of the deceased partner), or to give surviving directors the funds to buy a deceased director's shares. The means the surviving partner or directors retain control over the business, and the family of the deceased partner or director is financially supported.

4. What type of cover is needed? The type of business protection cover required depends on the type of business you have set up. Some business protection products that may be useful include co-directors/share buyback insurance, partnership protection insurance and keyperson insurance. The first two are obvious choices, but keyperson insurance can be important too. As the business grows, you may find that you appoint key members of staff, or you may already have appointed one, that are vital to the running of the business – for example, a sales director. Keyperson insurance is designed to help the business continue and recover from the loss of such a staff member and can be used to cover things like the impact on profit or the cost of finding a replacement in the event of death or serious illness.

5. What is the contingency plan? Sometimes in business it is easier to deal with the immediate and definite demands, rather than think about the things that may or may not happen in the future. This short-term approach can lead to all sorts of problems when something unforeseen does happen, such as a death in the business. Think about this from all angles – from the immediate removal of key skills and manpower to the time and cost associated in replacing them and how to survive in the meantime. Put in place a sound contingency plan for dealing with death or serious illness and concentrate on building your business with peace of mind. Don't risk throwing all your hard work away.