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Now you can! Robert Sayman (Click here for Sayman Bio) brings you that experience and focuses his service where you may need it the most.
Areas like:
- Identifying undiscovered risks to your business
- Evaluating your best retirement planning options
- Formulating a business continuation plan
- Addressing your specific business concerns
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704-542-5499
Business Planning
What Are the Basic Types of Business Organizations?
The Top 20 Most Costly Mistakes BEFORE and AFTER Incorporating,And How To Avoid Them
How would disability affect me as a business owner?
What Retirement Options Should Be Considered By a Business Professional?
Why is a Business Continuation Plan Important?
What Are the Basic Types of Business Organizations?
|
Basic Types of Business Organization |
|
|
Sole Proprietor |
Partnership |
C Corporation |
S Corporation |
Limited Liability Company |
|
Creation |
No written document is necessary |
By oral or written agreement |
Articles of incorporation filed with state |
Articles of incorporation filed with state |
Operating agreement/articles of organization filed with state |
|
Life Span |
Expires when owner dies |
Agreement can set time, otherwise, dissolved at death of any partner |
Continues on after shareholder's death |
Continues on after shareholder's death |
May dissolve on a member's death, retirement, backruptcy, resignation or expulsion. |
|
Management Responsibility |
Sole Proprietor |
Partners |
Board of directors elected by shareholders |
Board of directors elected by shareholders |
Managers |
|
Liability |
Sole Proprietor is personally liable for all debts |
Each partner is personally liable for all business debts or liabilities |
Liability limited to assets of corporation, not shareholder's assets |
Liability limited to assets of corporation, not shareholder's assets |
Liability limited to assets of corporation, not member's assets |
|
Income Taxes |
All income and expenses are on sole proprietor's tax return |
Partnership prepares information return, but income is taxable to partners? |
Corp. pays tax on income, less expenses. Reasonable salaries are deductible to corporation and taxable to employees. |
S corporation files information return, but income is taxes to shareholders? |
Company files information return, but income is taxes to the owners (members)? |
|
Sale or Transfer during Lifetime |
Sole proprietor may sell or give away any asset |
A transfer will dissolve the partnership, unless remaining partner(s) agree(s) to new partner |
Stock easily transferred. Remaining shareholders may have a first right of refusal prior to a sale to an outsider. |
Restricted to 75 shareholdres who are US citizens, estates and certain types of trusts |
Members owning substantially all of the compnay may freely transfer interests without consent. |
|
Sale or Transfer at Death |
Usually dissolved. Estate may sell it or operate it. |
Automatically dissolved unless agreement to contrary |
Stock can be transferred to heirs. Can be sold or retained, unless buy-sell agreement exists |
Estate is eligible shareholder only during estate administration. Otherwise, same as above. |
Estate is eliglible shareholder. Otherwise, same as above. |
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How would disability affect me as a business owner?
Disability of a Business Owner
Many business owners have established buy-sell agreements to protect one another and the business in the event of an untimely death. Very often these agreements are funded with life insurance to make certain that the necessary dollars are available at the time of death to purchase the business interest.
The death of a business owner can be devastating to the business and to his and her family. Yet, the probability of long-term disability prior to age 65 is greater than the probability of death. Frequently, however, the probability of a permanent disability is not provided for in the buy-sell agreements.
Business owners can amend existing buy-sell agreements or have separate agreements to provide for this potential disaster. There are also special disability insurance policies which will fund the disability buy-sell. These plans are set up to pay a lump sum, a series of payments or a combination of the two.
Key Elements to Consider
- Definition of disability: How disability is defined in the agreement is very important and should probably be tied to the definition in the disability insurance policy.
- Elimination period: This is the period of time between the first day of the disability and the trigger date; e.g., 12 months to 24 months are frequent options.
- Successive disability: This is the situation when a disabled person temporarily returns to work but thereafter has a recurrence of the disability. In many plans, the successive disability periods can be tied together to meet the elimination period.
- Trigger date: This is the date at the end of the elimination period when the buyout begins and the insurance company begins paying on the policy.
- Funding period: This is the period over which the buyout payments are made. It can be an immediate lump sum or spread out over a period of months; e.g. 12, 24, 60, etc., or a combination of both. The funding period specified in the policy should match the terms of the buy-sell agreement.
- Recover from disability: The recovery of a disabled person after the buyout has begun can raise several questions, among them: Does the funding stop? Can the person return to work with the same company? Lump sum settlement plans, in some cases, can remove sum of the uncertainty.
- Buy Sell Agreement: The buy-sell agreement must be in force at the time of disability in order for payments to be made from the policy.
- Converting to individual coverage: Sometimes the disability plan will be convertible to individual coverage if the business has no further need for the coverage, the owner needs additional individual coverage, and he or she meets certain income and, possibly, physical requirements.
- Involvement in the business: Many insurers require that the business owner be actively involved in the business.
Tax Basics for Disability Buyouts
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|
Corporation |
Partnership |
|
|
Stock Redemption by the Corporation |
Cross Purchase by the Stockholders |
Entity Buy-Sell by the Partnership |
Cross Purchase by the Partners |
|
Are premiums for a disability policy to fund a buyout deductible? |
No
IRC Sec.265 (a)(1) |
No
IRC Sec.265 (a)(1) |
No
IRC Sec.265 (a)(1) |
No
IRC Sec.265 (a)(1) |
|
Are the proceeds from a disability policy taxable income? |
No
IRC Sec.104(a)(3) |
No
IRC Sec.104(a)(3) |
No
IRC Sec.104(a)(3) |
No
IRC Sec.104(a)(3) |
|
Are payments from the corporation or partnership to individual owner deductible to the entity? |
No |
N/A |
No |
N/A |
|
How are benefits taxed to the individual receiving them? |
If an complete redemption, it is treated as a sale or exchange. IRC. Sec. 302(b)(3) |
Capital gain on excess of purchase price over his or her basis in the stock. IRC Secs. 1001: 1221; 1222 |
Return of basis is nontaxable. Excess is generally taxes as ordinary income. IRC Sec. 736(b) |
Capital gain on excess of purchase price over his or her basis in the partnership. |
|
Can the sale qualify as an installment sale to prorate the gains over the years in which payments are received? |
Yes
IRC Sec. 453 |
Yes
IRC Sec. 453 |
Yes
IRC Sec. 453 |
Yes
IRC Sec. 453 |
Business Overhead Expense
Another form of disability insurance specially suited to the business owner is Business Overhead Expense (BOE). BOE policies are designed to reimburse certain business expenses of the owner while he or she is totally or partially disabled. The funds provided by the BOE policy help the business survive during the time of the owner’s disability. Often, the BOE policy is the reason the owner has a business to return to after the disability. Should the disability appear permanent, the owner usually has additional time to make decisions regarding the future of the business.
Generally speaking, there are only certain types of business owners who qualify for BOE coverage. These include owners of closely held businesses, owners of small businesses and professionals with their own practices.
Some of the expenses typically covered by a BOE policy include the following:
- Legal and accounting fees
- Utilities
- Principal payments on debt
- Leased equipment
- Business insurance premiums
- Office supplies
- Salaries of non-owner, non-family employees
- Professional dues
- Business taxes
- Rent
- Workers compensation
In no instance is there any payment from a BOE policy to the business owner. Instead, these funds must come from his or her own disability plan.
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What Retirement Options Should Be Considered By a Business Professional?
Many entrepreneurs who start or purchase a business do so for a number of reasons, both emotional and financial. Social status, the freedom to be your own boss and the potential for a high income are a few of the reasons commonly cited.
For some, business ownership is also seen as a primary way to pay for retirement. If everything goes as planned, the business owner works hard and, over time, the business grows and becomes more valuable. When the owner reaches a certain age, the business is sold, with the proceeds from the sale funding the retirement years.
The Realities of Business Ownership
Using the business as the sole means of achieving financial independence amounts to placing a bet that the owner will be able to sell at the right time, the right price and under the right terms. There are several reasons why this may not happen:
- Business failure: Despite good intentions and hard work, businesses do fail. In 1998, for example, there were 155,141 new businesses started in the United States, in the same year, 71,857 businesses failed.2
- Timing of the Sale: Selling a business is a complex, often time-consuming procedure. The actual process of finding a buyer, negotiating the deal, arranging financing and finally choosing the sale may extend over months or even years.
- Proceeds: Depending on market conditions, the amount realized may not be enough to pay for retirement. Income taxes will inevitably consume some of the proceeds. The owner may have to accept installment payments, rather than a lump sum.
- “I am the business”: The value of a business may depend largely on the skills and/or customer relationships of a particular owner.
Diversification to Reduce Risk
A business owner who seeks to reduce risk will view his or her business as one asset among many. In addition to the business, a diversified portfolio could include the following:
- Qualified retirement plan: Business income is used to fund employer-sponsored qualified plans with a current deduction for contribution and tax-deferred growth.
- Nonqualified plans: Nonqualified deferred compensation plans are often used to reward selected employees and serve to supplement qualified retirement plans.
- General investment portfolio: A business owner can develop a general investment portfolio, outside the framework of the business
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Why is a Business Continuation Plan Important?
Competing Interests of Heirs and Surviving Owners
These interests are many and may include the following.
|
What Heirs of Deceased Owner Want |
What Surviving Owners Want |
| Top Dollar for their interests |
Minimum cost for the interest |
| Prompt settlement of the estate |
Prompt transfer of the business interest |
| Set value of business for estate tax purposes |
Full control of the business - no interference from decendant's family |
| Relief for family of worries regarding the business and its creditors |
Continuing line of credit |
|
Retention of customers and employees |
Potential Problems Without a Written Agreement
Frequent results include:
- Heated conflicts amount the remaining owners and the decedent’s family;
- Unhappiness on all sides, and sometimes litigation;
- Delays in settling the estate and continuing business growth;
- Loss of customers; and
- Possible liquidation of the business which may bring less than full value
The Solution: A Written Agreement (and cash)
Taking the time now to see that the business will pass in an orderly manner at time of death will benefit all parties and their heirs. A written agreement can provide:
- An orderly transfer of the business;
- A mutually agreeable sales price;
- Mutually agreeable terms of sale;
- A value that is binding on the IRS for federal estate purposes3; and
- Stability for customers, staff, creditors and investors.
An agreement which is favorable to all parties can be more easily drafted prior to a crisis.
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Call Robert Sayman today or Click Here for a free, no obligation consultation and learn how to put Fortune 500 power into your business.
704-542-5499
1 Some states tax partnership, S corporations and LLC income.
2 Source: Statistical Abstract of the United States, 2001. See Section 15, “Business Enterprise”, report No. 737, Business Starts and Employment Associated with Start: 1990-1999.
3 Under the Tax Act of 2001, the federal estate tax is gradually phased out until its final repeal in 2010. If Congress does not act at that time to repeal it for the years following, it will automatically revert back to the rates in effect during the year 2001, with an exemption for the first $1,000,000 of assets.
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