A
partnership is fairly simple to set up. Two or more
people get together with the intent of going into business; they
get the appropriate licenses and file the necessary papers with
the State and you are in business. When the areas of expertise
of these people compliment each other the situation is ideal.
Although each partner is taxed on an individual basis they all
are liable for the debts of the business.
The partnership is treated like a separate entity in some ways
as it can own property and execute documents, however, when it
comes to payment of taxes or debt liability the owners are
responsible. When a partner dies the company must be dissolved.
If the survivors want to continue the business they must form a
new company.
At the time of the formation of the partnership an
agreement
should be drawn up stating the percentage of shares each partner
owns and under what conditions and in what manner shares can
be disposed of. The agreement can be modified later upon the
approval of a majority. If there are problems between partners
the agreement is the legal document that they should be able to
fall back on.
Advantages
Fairly simple and inexpensive to set up. Makes going into
business with family members easy and unlimited. Capitalizing a
business is simpler and stronger when many people put their
resources together. Because many people are putting their assets
together the borrowing power is greater. Each partner has the
unique opportunity of specializing in their own area of
expertise.
Disadvantages
Unless otherwise stated in an agreement the partnership must be
dissolved upon the death of a partner. The remaining partners
must purchase or inherit the shares of the deceased partner
unless otherwise stated in an agreement pertaining to
succession. A partner can require that the business be dissolved
at any time. Cannot take advantage of tax write offs like group
life insurance, disability and health. All partners are at risk
for liabilities. All assets of the partnership are at risk in a
limited partnership. If a partner wants to leave the partnership
he may suffer financial loss.
Life Insurance
Now let us look at how life insurance applies to this type of
business. Let us suppose a partner died or had to leave the
partnership because of disability. This situation could destroy
the business, however, if the business had a properly drawn up
buy-sell agreement funded by life insurance and
disability insurance much of the problems would be averted. Each
partner would have a life insurance policy and a
disability
buy-out policy on his life paid for by the other partners.
Upon the death or disability of a partner the insurance company
pays an amount equivalent to the value of the shares owned by
the deceased. This money is used to purchase the deceased shares
from his heirs.
Whole life insurance has traditionally been used for this type
of business arrangement because of it's permanence but term life
insurance can also be used. A 20 year term or a 30 year term
policy would be be fine.
About the author:
For more than 40 years Donald has been known for his extensive
knowledge of the life insurance business. He has represented
some of the largest and best life insurance companies in the
United States as well as Canada. His advice is invaluable.
Donald's website is:
http://www.lifeinsurancehub.net
