Small-Business Ownership: Will your closely held business fail to survive?
Many small, closely held businesses will fail to survive beyond the first generation. One reason is the failure to plan for the disposition of the business at the owner's death, disability, or retirement. A second reason is the death or disability of a key employee.
Have you thought about what will happen to your business? This is probably one of the toughest issues that you will have to face as a business owner. Proper planning is absolutely essential.
Buy-Sell Arrangements
You can successfully plan for the future disposition of your business through a properly structured buy-sell arrangement. This arrangement can provide for the sale of your business to a co-owner, employee, family member, or other interested party. Not only does it create a ready market for your business, it also establishes the method for valuing the business at the time of sale.
The agreement should also include how payment will be made for the business interest. Options include cash payments from savings, borrowing, an installment sale, or life and/or disability income1 insurance.
Since death and disability can occur without notice, saving for these events is impractical. There may not be enough time to accumulate sufficient funds in a savings account established for this purpose before those funds are needed. And, with the loss of an owner who is a key figure in the success of your business, loan institutions may be reluctant to lend money to the company. Selling the business through an installment sale requires the former owner's heirs to rely upon the future success of the business in order to receive payments.
If you use life and/or disability income1 insurance to fund the obligations under the arrangement, you can be assured that cash will be available when you need it. A buy/sell arrangement, funded with insurance, may be the most important step you can take in securing your financial future and the continued operation of the business that you have worked so hard to make a success.
Key Employee Protection
When a key employee, on whose talents, managerial skills, and experience you depend, is lost because of disability or death, the financial loss to your business can be devastating. Creditors may become nervous about extending credit. The goodwill you have worked so hard to establish may be diminished by a change in management. But you can protect your business from such a loss through the use of life or disability income1 insurance.
Life insurance proceeds or disability income benefits will be paid to the business to be used to help meet debt obligations, offset lost sales, or cover the expenses associated with recruiting, hiring, and training replacement personnel.
Summary
Finding time to manage your company's strategic planning isn't easy. But it's best not to put it off. The key decisions you make today will have an impact on your company's performance, your employees' morale, and your executives' loyalty. Your Prudential licensed financial professional is prepared to work with you and your tax and legal advisors to help create the programs that are best for your company, your employees, your family, and you.
For employer-owned life insurance policies issued after August 17, 2006, IRC § 101(j) provides that death proceeds will be subject to income tax; however, where specific employee notice and consent requirements are met and certain safe harbor exceptions apply, death proceeds can be received income tax-free. Life insurance proceeds are otherwise generally received income tax-free under IRC § 101(a).
1Availability of disability income insurance varies by carrier and state.
Life Insurance is issued by The Prudential Insurance Company of America, Newark, NJ and its affiliates.