Death & Taxes (part 1)
Wednesday, February 25th, 2009
They say the only two certainties in life are “death and taxes”. Each of these can, and will, have their own blog post, but I we shall start with Death. While this is a terribly morbid subject, I assure you it is something every business owner should take into consideration for a multitude of reasons. Business entities, continuation planning, and insurance are just a few issues that should be contemplated.
There are a number of different types of business entities, each with their own strengths and weaknesses, and I do not presume to know which entity best suits the reader. That is a subject best left to an accountant, tax advisor, or lawyer, and I am none of these. Having said that, one of my preferred entities is a subchapter S Corporation, primarily because it exists outside of the individuals who run it. It has its own name, tax identification number and legal liabilities. Most importantly, if anything happens to one of the principals, the corporation continues in perpetuity. This is in stark contrast to sole-proprietorships and partnerships which dissolve upon the death or incapacitation of a principal.
In the event a sole proprietorship or partnership has been chosen, a thoroughly detailed, legal document should be in place to dictate what happens in the event of someone’s death. The goal should be to keep “business as usual” for the remaining principals, not to mention addressing the rights and responsibilities of the survivors of the deceased. If the decedent is the business, as in the case of a lawyer, physician, or CPA et al, then what plan is in place to service their clients? Can these assets (client lists) continue to be served or sold to another individual or business?
Insurance is a tricky subject that I am licensed to talk about, but will only speak of in generalities for this blog. Insurance, in its simplest terms, is an investment you hope to never have to collect, but is of the utmost importance if it is ever needed. In particular, there are insurance policies to help offset the expenses of keeping the business running, searching for principal or executive replacements, and buying back stock from the decedent’s estate.
These situations should ideally be addressed before starting a company, but if that is not possible, they should be addressed immediately! Do not wait for this or that to happen before you plan for these eventualities or you may lose your ability to do anything about it at all.
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