What Type Of Business Do You Own?



Is your business a Sole Proprietorship?

Are you part of a business Partnership?

Is your business an S Corporation?

What about a C Corporation? Is this how you incorporated?

Have you taken advantage of the new Limited Liability Company laws?

How about Key Employees? Do you have any employees that you can categorize them as Key Employees?

Small business life insurance as it applies to each type of business is different in many ways but there are also many similar features as well. What we are discussing here is not group life insurance but more specifically life insurance as it applies to the owners of each business and life insurance for the key employees. Let us take a look at each type of business and how life insurance could go a long way in protecting the business itself as well as the heirs of a deceased business owner.

The Sole Proprietorship.

Because the owner of a sole proprietorship and the business itself is considered one and the same one may think that the need for small business life insurance is limited. Nothing could be further from the truth. We put in a lot of time and effort building a business that has to be dissolved at our death. We do want to have this business transferred to a member of the family when we die. How can this be done?

The estate of the sole proprietor can sell the assets of the business upon his or her death. A small business life insurance policy can be bought during the lifetime of the owner the proceeds of which would be used to buy the business. A buy sell agreement, which would be binding, would determine the terms and the amount to be paid for the business.

Let us assume the proprietor is married and has a son or daughter who is interested in taking over the business upon his death. This young person has spent a lot of time learning the intricacies of operating the business from his or her father. So dad decides he wants to transfer this business to this child upon his death. He has a buy sell agreement drawn up by an attorney that would fulfill his desires. This agreement is funded buy a small business life insurance policy specially bought for that purpose.

The proprietors wife is not particularly interested in the business but if the business owner dies before her she will still need income. The proprietor dies. The proceeds of the small business life insurance policy is used to purchase the business from the estate and the wife has full value in cash. She can use this money to purchase an annuity that would pay her an income for a certain number of years or for a lifetime. Of course this decision will depend on the amount of money we are talking about here.

The Partnership.

The use of small business life insurance in a partnership is very simple and straightforward. The ownership of this partnership is in the hands of three partners. For the sake of easy explanation let us assume that that these partners own equal shares. A buy sell agreement would be set up that would state that the partnership would buy the shares of a deceased partner from his heirs. The buy sell agreement would be binding. The heirs cannot decide they don't want to sell. The partnership would buy a small business life insurance policy on the lives of each of the partners in the amount of the value of their shares. The proceeds would be used to fund the purchase. In some cases the policies can be owned by the partners themselves. The results are the same.

The Corporations.

Small business life insurance for c corporations, s corporations are limited liability companies is very similar to that of the partnership. The corporation usually owns the policies on the lives of the principals. Upon the death of a stockholder the corporation buys the stock from the heirs of the deceased. A small business life insurance policy is the least expensive way to fund the buy sell agreement. It is recommended that the insurance is updated on a regular basis and that the buy sell agreement is reviewed and updated from time to time...as it is binding.

Key Employee Life Insurance.

What state would your business be in if a key employee died? Have you given this any thought? In my 40 years in the life insurance business I have seen many interesting situations. Some businesses had no key employee life insurance on their valuable employees...much to their detriment. Others were prepared and things continued on smoothly after the death of the key employee. It is recommended that if a business has a very valuable key employee that they buy a small business life insurance policy on the life of that employee equal to about 5 years of that employees income. Upon his or her beath the proceeds of the policy is paid to the business and used to help keep the business going while the company finds a capable replacement.