the Enterprise Blog #11: Does My Small Business Needs Insurance?

In This Issue:
  • Six Types of Insurance You'll Need for Your Small Business
  • What Happens if You, Your Partner, or A Shareholder Dies or Become Disabled? Now May Be A Good Time To Consider: "Insurance for Buy-Sell Agreements"!


Six Types of Insurance You'll Need for Your Small Business

Very few things in life are riskier than starting your own business. With so much to think about, it can be reassuring to know that some aspects of your business are covered by insurance. Small business owners have to deal with many different insurance needs, ranging from health to property to liability. If you’re thinking about starting a business or if you are already started your business, Joel Downer of Lawe Insurance Brokers Limited, located at Suite 104, 28-28 Barbados Avenue, Kingston 5, advises that you give careful consideration to the following types of insurance:
  • Property insurance. This is probably the most important type of insurance for protecting the financial wellbeing of your company. Property insurance should cover your assets, including money, inventory, equipment (including both office supplies and machinery) and even intangible property like the trademarks you own.
  • Liability insurance. This type of insurance is also known as commercial general liability (or CGL). Liability insurance protects you in the event that you are sued. It covers four different events that your business could be held responsible for: bodily harm (to individuals other than your own employees, who are covered by worker’s compensation), slander / libel, damage to someone else’s property and making misleading public statements or false advertising.
  • Auto insurance. If your company uses a company vehicle (and most businesses today do), you’ll need to have it insured. This will protect you in the event that your vehicle is damaged, stolen, or most importantly, involved in an accident in which your company is found to be at fault. If you use the same car for business and personal use, make sure that your insurance company knows this.
  • Worker’s compensation insurance. This insurance is mandated by law. It protects your employees (and their dependents) by giving them financial and medical benefits in the event they are injured or killed on the job. It is not the same as health insurance.
  • Health insurance. Employers are generally not required by law to provide their employees with health insurance, but many choose to do so because it’s a benefit their employees want. It’s up to the business owner to decide whether to get group coverage or individual coverage.
  • Natural disaster insurance. This only applies if your business is located in an area that’s particularly susceptible to catastrophic weather events, such as hurricanes and floods.


What Happens if You, Your Partner, or A Shareholder Dies or Become Disabled? Now May Be A Good Time To Consider: "Insurance for Buy-Sell Agreements"!

Own a business? Have a will for your business? Sole proprietorships, partnerships and small closed corporations all need to consider what happens if the owner or one of the partners or shareholders dies or becomes disabled. Who will purchase the company or the deceased partner’s or shareholder’s interest? What is a fair price? When will the sale be made? Will the deceased owner’s/partner’s/shareholder’s families be given a fair shake and taken care of? These are real questions every small business should deal with before the event occurs. The business itself may also suffer form a supplier’s or creditor’s perception of the value of the deceased person to the success of the business. Key employees may consider the deceased’s death as a reason to move elsewhere. There needs to be continuity and a smooth transition in the business when tragic events such as deaths or disabilities occur. The buy-sell agreement is important to resolve a lot of problems dealing with employees, creditors, suppliers and the deceased person’s family. Importantly, where will the funds come from to provide continuity and a smooth transition? Everyone is going to die and sometimes it happens totally unexpectedly and at a much younger age when expected. There are no dying rules specific to owners, partners and shareholders. Stuff happens! A buy-out sell agreement is, essentially, the will for the business and it eliminates a lot of difficulties and heartaches when a key person dies. A plan needs to be in place and a method of funding that plan must also be available. As a small business owner, there are several options for you fund a buy-sell agreement:
  • You can wait and see – “I’ll worry about that if and when it happens.” A sole proprietor can say, “I’ll be dead, so no reason for me to worry about it.” Sure! If it is a partnership, the partnership dissolves automatically and, “My partner will do the right thing.” Is that what you want? You can use your personal funds to buy-out your partner’s stock. But what if it comes at a bad time? Your personal stock portfolio is down, you’ve got two children in college, and you’ve had to take less income form the business lately because business has been in a slump. Maybe, after a lengthy probate the corporation can buy the stock and place it into treasury stock, if funds are available. But where does this leave the family of the deceased? Would you leave it up to your partners to do the right thing for your family no matter what the personal cost would be to the partner?
  • You can borrow funds – obviously, borrowing funds is not an option to a dead sole proprietor. Could a key employee put together the money to purchase the company? Can the surviving partner(s) borrow enough to purchase the assets of the deceased partner? Maybe they can take out a second mortgage on the house? Maybe the lost one is the one depended upon by bankers and suppliers. Maybe the repayment and interest is simply too burdensome.
  • You can set-up a savings account within the company in anticipation of an event like this happening but, again, if you are a corporation there may be accumulated earnings tax problems and if you are not a corporation, it may be difficult to maintain a savings account or the death may occur prematurely before enough funds are available.
  • You can buy life insurance.
Let’s look at this from a sole proprietor’s, a partnership’s and a corporation’s perspective. Sole Proprietor Unless a sole proprietor (let’s call the person and “owner”) has a family member or a close relative to turn the business over to and feels comfortable the owner’s desires for his/her family members will be served, the options are limited. The business can be closed, it can be sold to an outsider, although small businesses are sometimes difficult to sell, or, if the owner wants his ‘baby’ to continue, it can be sold to one or more competent and faithful employees. The buy-sell agreement to a trusted employee becomes a two-step plan:
  • an agreement is prepared which sets forth the employee’s obligation to buy, the price the employee(s) will pay for the business and the method of payment
  • the employee takes out a life insurance policy on the owner. The employee is the owner of the policy, the person who pays the premiums and the beneficiary.
If the owner dies, the death benefits of the insurance policy would be used to buy the business from the owner’s estate. Partnership Partnerships are automatically dissolved with the death of one partner; therefore, a buy-sell agreement is very important. In this case, a buy-sell agreement would sell the deceased’s interest in the company to the surviving partner(s) at an agreed to price. For partnerships there are two different plans:
  • Cross-Purchase Plan – in this plan each partner buys a life insurance policy on each of the other partners. The partnership itself is not a participant in the agreement. Each partner owns, pays the premium payments and is the beneficiary of the insurance policies on the other partners in an amount equal to his share of the purchase price set forth in the buy-sell agreement. The proceeds are used to purchase the partner’s business interest from the heir’s of the deceased.
The number of policies required for a partnership with multiple partners would be the number of partners X (number of partners-1). For example, a plan for a partnership with three partners would require six separate insurance policies. Each partner would need a policy on each of the other parties. Let’s say a business worth $600,000 is owned by three partners in equal shares. Each partnership would be worth $200,000 and if one of the partners died, the other two partners would have to provide $100,000 each to equally purchase the deceased person’s share. Therefore, each partner, in this case, would take out a policy on each of the other two partners in the amount of $100,000 each.
  • Entity Plan – in this plan partners enter into an agreement with the partnership who owns, pays the premium payments and is the beneficiary of the policies. When a partner dies, his/her interest is purchased from his/her estate by the partnership at the buy-sell agreement price and the interest is then divided among the surviving partners in proportion to their own interest.
In this case, the $600,000 business discussed above would purchase a $200,000 policy for each of the three partners. If one of the partners dies, the business pays the deceased partner’s share from the death benefit of the policy and distributes those shares equally to the two remaining partners. The remaining partners, in this case, would then each own 50% of the business. Because of origination funding, buy-ins, etc., not all partnerships are owned equally by the partners. In those cases, both the insurance policy’s amounts and the benefits distributions would be made on the basis of each partner’s proportionate share in the business. Additionally, none of the premium payments in the above plans are tax deductible; however, the benefits are tax-free. Closed Corporation Unlike a partnership, a closed corporation (i.e. a small number of shareholders who run the business) does not cease to exist with the death of one of its shareholders. For closed corporations, there are also two different plans:
  • Cross-purchase plan – each stockholder owns, pays for and is the beneficiary of life insurance on the other stockholders in amounts equivalent to his or her share of the purchase price. The corporation is not a party to the agreement. The surviving stockholders purchase the interest of the deceased stockholder as individuals from the estate of the deceased stockholder. This plan is like the cross-purchase plan described in the partnership section above. Obviously, the more shareholders the more difficult this plan becomes.
  • Stock redemption plan – the corporation, rather than the stockholders, purchases the insurance policy, pays the insurance premiums and is the beneficiary on the lives of each shareholder. The amount of insurance on each stockholder is equal to the proportionate share of the purchase price. Upon the death of one of the stockholders, the death benefits are paid to the corporation who then buys the deceased’s stock from the deceased’s estate. Premiums are not taxed deductible but the proceeds are received income tax free.
Any agreements and insurance polices within a business must be integrated with the overall plan and objectives of the business. Careful consideration must be given to the selection of the plan which is right for your business and to the method of funding your plan.

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EDITOR’S NOTE: This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contract your insurance agent. Our articles are intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. If you need more information or would like personal advice please consult insurance professional, Downer of Lawe Insurance Brokers Limited, located at Suite 104, 28-28 Barbados Avenue, Kingston 5. Phone: (876) 968-6317; Mobile: (876) 410-6929; eMail: