SMALL BUSINESS INSURANCE & RISK MANAGEMENT GUIDE
Key Person Losses
What would happen to your business if an accident or illness makes it impossible for you to work? What if one of your partners or your sales manager suddenly died? Most of us would rather not think about such a what if, but it is important for you to prepare your business for survival long before a key person dies or is disabled.
Serious Illness or Disabled Owner
- What will the owner's source of income be? How will it be treated for tax purposes?
- Who will continue the business? What if that person is not qualified or is a minor?
Death of an Owner
- If a will is not in place before the owner's death, will the business close or will someone inherit it?
- If the owner's life savings are invested in the business, will the surviving family be able to use them wisely?
- What will be the surviving family's source of income while the future of the business is being decided? If the business is to be sold, where will working capital come from for the transition period? How will the fair market value of the business be determined? Will the fair market value change because of the loss of a key person?
- If the business forms the bulk of the estate, what are the income and inheritance tax implications for the surviving spouse and heirs?
- Is there some predeath strategy that could minimize that tax liability?
The answers to these questions can best be determined with the help of your business's planning team: your attorney, accountant and insurance agent. Their expertise in estate planning, financial planning, and current legal and tax codes will help you develop a plan for your business's survival.
Death of a Partner
Unless the partners have prepared some other binding arrangement, a partnership is dissolved when one partner dies. The duties of the surviving partner(s) are limited to winding up the affairs of the partnership. Also, the surviving partner(s) will be personally liable for losses that the business's assets are insufficient to cover.
Partners may set up agreements for the surviving partner(s) to purchase the deceased partner's interest at a prearranged valuation. Business life insurance on each partner can provide the funds needed to purchase that interest.
- Who should pay the premium? The business? Each partner?
- What are the pros and cons of these alternatives?
- What are the tax implications of each?
- How would each affect the firm's cash flow?
There are many plans and many ways to set up the necessary insurance. Your planning team can suggest a wide range of options compatible with your needs, your firm's cash position and local and federal tax implications.
Death of a Major Stockholder
In most small incorporated businesses, there are only a few stockholders, and most of them take an active part in running the business.
Death of a major stockholder often throws a spotlight on the survivors' differences. Conflict or major personality clashes can seriously threaten the survival of a firm. Dissension also damages employee morale, can lead to a loss of business and may even harm the firm's credit rating.
Unless otherwise provided for, the deceased major stockholder's shares will become part of his or her estate. While the estate is being settled, the estate administrator can vote in the deceased stockholder's place. If a controlling interest in the firm is involved, the administrator can name a new board of directors and take over full control of the corporation.
- What if the heirs decide to get involved in the business? If they decide to retain the stock, will it provide enough income to support them?
- If the heirs decide to sell the stock, will the other major stockholders have the right of first refusal? Can a plan be set up to allow the surviving stockholders to finance a buyout of the heirs' holdings? Without such a plan, will the remaining stockholders' search for buyout funds have any impact on the firm's credit?
Once again, planning is essential. Your attorney, accountant and insurance agent can develop a legally binding strategy to prevent outsiders from unexpectedly coming into the business and to ensure an orderly changing of the guard should a major stockholder die.
Loss of a Key Person
What would happen if you were to suddenly lose the services of a key person (e.g., a sales manager or the office manager/bookkeeper) because of illness, disability or death?
- What impact will that person's absence have on sales volume? Costs? Productivity? Efficiency? The firm's credit?
- How will you reassign duties to cover the missing person's functions?
- What extra costs will you have to incur to recruit a replacement?
- How long will it take before the replacement is trained and productive?
This article is reprinted by permission of the SBA and The Travelers, Hartford, Connecticut.
For more information on SBA programs go to www.sba.gov