Business insurance can help to address these needs of a business owner using insurance products
* economic loss to the business when a key employee dies,
* disposition of a business owners interest upon death or other separation from the business,
* attraction and retention of valuable employees, and
* rewarding faithful employees.
The Business Insurance section of assignedriskinsurance.com and Affiliates Online covers a number of business insurance topics,.
* forms of business organizations, sole proprietorships, partnerships, corporations, and limited liability companies
* financial statements
* key employee life insurance
* business valuation
* entity buy-sell agreements
* cross-purchase buy-sell agreements
* Section 303 stock redemptions
* disability buy-out agreements
* executive bonus arrangements (Section 162)
* split-dollar arrangements funded with life insurance
* nonqualified deferred compensation arrangements
* group-term life and group carve-out
* cafeteria plans (Section 125)
* salary continuation (sick pay) plans, and
* business overhead expense protection funded with disability income insurance
The Sole Proprietorship Defined
A sole proprietorship is an unincorporated business (a business other than a corporation) which is owned and usually managed by one person. The business has no separate existence apart from the owner. The owner and the business are one and the same.
Business property is owned by the proprietor and not by the business. The business may only sue and be sued in the name of the owner, and all business assets and debts are personal assets and/or debts of the proprietor.
Of the types of business organizations, sole proprietorships are by far the most common. A significant percentage of farms, retail shops and professional practices, such as law, medical, and dental offices, adopt this form of business organization.
Why Are Sole Proprietorships SO Popular?
There are three principal reasons why the sole proprietorship enjoys such widespread popularity:
* ease of formation
* unified management
* freedom from some government regulation.
What are the Disadvantages of Sole Proprietorships?
Obviously, the sole proprietorship is not free from disadvantages. If it were, there would be no need for partnerships or corporations. Here are the disadvantages:
* only one manager
* limits on capital
* unlimited personal liability.
What is the Taxation of Sole Proprietors?
The sole proprietorship is not recognized as a separate tax entity. It is neither a tax-paying entity like the corporation nor a tax-reporting entity like the partnership. No tax return is filed by a sole proprietorship.
Instead, the profit or loss from the business is reported on Schedule C (Schedule F in the case of a farm) and filed with the owners Form 1040. The business income or loss is treated as the owners personal income or loss and, of course, is taxed at the rates that apply to individual taxpayers.
The significant tax factors affecting sole proprietorships are
* no double taxation of earnings to business entity and to sole proprietor
* operating losses from business may offset other personal income from other sources
* health insurance premiums may be partially deductible.
What happens upon Death of the Sole Proprietor?
When a proprietor dies, business assets become part of the deceased owners estate, and business debts become debts of the estate. So, the personal representative of the estate may be forced to sell the business assets in short order to pay estate debts or to pay death taxes due on the estate.
In addition, the personal representative may be required to convert tangible property into money for distribution to the estate beneficiaries. In either event, the personal representative may not be able to readily find a buyer for the business as a "going concern." Thus, the business inventory and equipment may have to be sold piecemeal and/or at sacrifice prices.
Where business assets are disposed of in a forced sale, the true value of the business will seldom be realized. Click here to find out why.
Continuing a Sole Proprietorship
A forced liquidation sale will, in most instances, cause the estate to lose the value of business goodwill, along with part of the value of the other assets. In addition, the proprietors family will lose the income that the business produced as a going concern.
The financial hardship which results may be acute if the business accounted for most or all of the family income. The logical question is: Why doesn't the personal representative of the estate continue operating the business until an orderly disposition can be made? Click here to find out.
The personal representative must obtain specific authority to operate the business beyond the time needed for liquidation. Click here to find out how such authority may be obtained.
The Sole Proprietors Will
The proprietors will should grant the personal representative of the estate the power to sell the business, including determination of the price and conditions of sale. It should also grant full authority to continue the business until it can be disposed of (without personal liability for losses from reasonable actions the representative might take), the power to employ persons to assist in liquidation and the power to execute all necessary documents incident to liquidation. In other words, the representative should be given broad power to operate the business until an orderly liquidation can be effected, either by the sale of the business as a going concern or by the orderly sale of the business assets.
Problems of Continuing the Business
Even when the proprietor has authorized the personal representative of the estate to continue the business in order to achieve an orderly liquidation, there may be several problems
* First, the representative may not have the necessary time it takes to run the business on a day-to-day basis.
* Second, the representative may not have the expertise required to manage the business.
* Third, there will be a time lapse between the owners death and the time the probate court issues the necessary credentials to allow the personal representative to operate the business.
* Finally, business assets may have to be sold to pay death taxes and estate costs, and thus made unavailable for business operation.
Options Other than Liquidation
By providing the personal representative with broad powers to continue the business, the sole proprietor can help assure that the business will be liquidated in an orderly fashion. In many cases, liquidation is probably the best possible way to dispose of the business when the sole proprietor dies.
Family Retention
But, in other situations, the sole proprietor may want the business to remain in the family or to be sold to one or more of the businesses employees. If the business has been owned by the proprietors family for many years, the proprietor may want family ownership to continue. If there is someone in the family with the experience and desire to take over ownership and management of the business, keeping the business in the family is clearly the logical choice. Retaining the business in the family would also make sense if there is a high investment return present in the business.
Estate Liquidity
Retention can be accomplished simply by bequeathing the business to a family member. But the owner would have to give the representative the power to continue the business during the estate administration process and would need to provide enough liquidity in the estate to pay debts and taxes without forcing the sale of the business or business assets.
Employee Purchase
Perhaps there is no family member willing or able to continue the business, but there is an employee who wants to buy the business when the owner retires or dies. Here, again, the proprietor will have to make arrangements to guarantee an orderly execution of this plan. This could be accomplished by a properly implemented buy-sell agreement.
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