Having been involved as a partner in a farm equipment dealership in Grande Prairie for 11 years, I am very aware of the issues and pitfalls that small businesses are exposed to. And having a business partner killed in a plane crash made me a strong advocate of having a shareholders agreement.
Essentially a will for a business, shareholders agreements stipulate how to valuate the firm, fund a share buy-back and a myriad of issues that must be addressed in event of the death, disability, divorce or bankruptcy of a partner. Suppliers and bankers get nervous when something happens that disrupts the operation of a business.
Plan for the unexpected: Many small businesses fail for a number of reasons, including lack of planning, poor management, inadequate funds, downturns in the economy, debt overload, etc. As you work through your business plan, look for solutions that provide financial stability to your business in situations when you could be vulnerable.
Life insurance can be a cost-effective way to help a small business be prepared for the unexpected, including:
Key Person Insurance: Small businesses or farms can be at significant risk if something happens to a key employee. In today’s competitive job market it’s not easy to find a replacement quickly. Key person insurance provides immediate cash to cover working capital and time to find and train a suitable replacement. It also assures creditors and employees that the business will carry on.
Business Loan Protection: Adequate debt financing can be difficult to obtain. Creditors often require business owners to personally guarantee a loan. Creditors may demand immediate repayment of outstanding debts if an owner or key executive dies. This often creates a significant burden, and may force the liquidation of key assets at fire sale prices at a time when the business is already severely impacted by the death.
Buy-sell Funding: A key component of any integrated financial plan is business succession. Business interests often make up a substantial portion of the wealth that owners have accumulated. Ensuring that a plan is in place for the eventual transfer of the business interest will help owners realize full value as well as ensure the business and the remaining or new owners survive the transition. This is particularly true if an owner dies prematurely.
Funding Capital Gains Tax at Death: Life insurance can also effectively fund the tax liability that arises at death. An individual who owns shares in a corporation, a partnership interest, or business assets will be deemed to have disposed of these properties at death. This results in a tax liability from capital gains and recaptured capital cost allowance. If funds or other assets are not available, the shares or partnership interest may have to be sold or business assets liquidated, possibly for a price below the fair market value.
Split Dollar Arrangements: Life insurance’s versatility makes it an excellent way to meet different needs within a businesses. One party may need financial protection on their death or someone else’s within the company, while another may need tax-sheltering for their investments. Life insurance can also be part of a compensation package used to attract the best employees.
If you would like an audit of your business to review any of these ideas, seek out a trusted financial advisor to help you with the process and design a financial safety net to protect you, your company and your family.
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