Sole Proprietor Buy-sell Plans _HOT_
Not all successful businesses are owned by groups of people or by larger corporations. Many companies began with just one person, and despite growing into larger and more valuable operations, one owner remains. The potential danger in running a successful business as a sole proprietor surrounds the death of the owner and the fate of the business.
sole proprietor buy-sell plans
A sole proprietorship is a business entirely owned and controlled by one person. According to the IRS, "a sole proprietor is someone who owns an unincorporated business by himself or herself." Sole proprietorships can consist of simple one-man operations or large organizations with multiple employees. In this respect, the structure of a business has little effect on its operation or growth, as nothing prohibits sole proprietorships from engaging in the same business ventures or opportunities afforded to corporations or other conglomerates.
Business succession planning is of extreme importance to any organization, especially sole proprietorships. Proper arrangements must be made to ensure the business continues in the manner desired by the current owner. Several methods exist to prepare the business, its employees, and the families of those involved for the unexpected or untimely death of the owner. According to PNC Bank, "a business succession plan can help you ensure that your business continues successfully and your financial goals are met." Making preparations early allows everyone time to get comfortable with the expected arrangements, raise any concerns about the intended plan, and make any adjustments deemed necessary and appropriate.
Without a plan in place, the death of the sole proprietor also means the death of the business. Because the sole proprietorship is not a registered business entity, anything owned by the business is considered personal property and passes to the estate of the owner. If estate taxes are owed, but insufficient cash exists to pay them, the business assets can be liquidated or auctioned to raise the necessary money. If the sole proprietor is married, the business in its entirety will likely pass to the spouse, potentially avoiding probate and estate taxes but creating other complications. In many cases, the spouse has no desire to own the business or does not have the skills and abilities to properly run it. Heirs are often left with both tangible assets and an intangible business concept that they don't want and can't sell.
A buy-sell agreement is one of the most important arrangements a sole proprietorship can have. This agreement structures the method and manner in which the business will continue in the event of the owner's death. In a 2003 article for Franchising World magazine, Patrick Olearcek explains that, "The proprietor and one or more key employees enter into an agreement which provides that the proprietor's estate will sell the business to the employee at death." By agreeing to buy the company, the key employee or associate relieves the owner's family of the responsibility, and instead provides them with a lump sum payment. A key employee, as opposed to the owner's family, is in a much better position to continue the business operations properly.
The majority of buy-sell agreements are funded with life insurance. In the case of the sole proprietorship, a policy covering the life of the owner is typically bought and paid for by the key employee who has agreed to purchase the business. The employee is also the beneficiary of the policy, which has a death benefit equal to the pre-determined purchase price of the business. Upon the death of the owner, the employee would receive the proceeds of the life insurance policy, then transfer that money to the owner's heirs in exchange for all interest in and assets of the business.
The disability buy-sell agreement functions in much the same way as the life insurance buy-sell. These plans provide for the sale and buyout of the business' key person's stock or owner's share of the business in case of disability. Since it is considered a valued disability policy, the plan usually allows for a lump sum payment for the purchase; however, periodic income payments are also a possibility which would actually reduce the cost. Disability buy-out plans typically contain extended elimination periods which allow time for the recovery of principal.
A sole proprietor (one owner) can arrange for the business' sale to a successor or to another predetermined buyer (for instance, an employee or family member) from the deceased's estate. The buy-sell agreement then is binding for the buyer to purchase the business and the estate is obligated to sell. A life insurance policy can be used to fund the agreement.
Self-employed individuals or small-business owners, primarily those with only a few employees.2 Must be a sole proprietor, a business owner, in a partnership, or earn self-employment income by providing a service.
As an example, for a sole proprietor April 15 would typically be the deadline to establish and fund a SEP for the prior tax year. If an extension was filed a sole proprietor can establish and fund a SEP IRA by October 15.
A Simplified Employee Pension plan (SEP IRA) is a small business retirement plan, appropriate for sole-proprietors, corporations or partnerships that are either owner only or small businesses with only a few employees. A SEP IRA may be the easiest small business plan to set up and maintain, but there are steps you must take to ensure you're running the plan properly. The list below doesn't necessarily cover all of your responsibilities. You may want to consult the IRS or a qualified tax advisor if you have additional questions.
Experienced with these plans, René Papin can advise you on a strategy by which the sole proprietor and the key employee would enter into a buy/sell agreement, and the key employee would purchase a life insurance policy on the life of the sole proprietor. Pursuant to the buy/sell agreement, upon the death of the sole proprietor, the key employee uses the death benefit to purchase the sole proprietors business from his estate.
General Partnerships are like sole proprietorships with more than one owner. Partners share managerial duties, profits and losses, and each is personally responsible (liable) for all business debt. Because the actions of one partner can result in personal liability for the others, partnerships have become less popular since LLCs have been around. For federal tax purposes, the business is required to file a partnership return, with the income or loss going to each partner based on how much of the business each owns.
A buy-sell agreement can be between shareholders of a corporation, partners of a partnership, or a key employee and a sole proprietor. The agreement obligates the surviving business owners, key employee, or the business itself to purchase the interest of the deceased owner. An attorney will need to prepare the buy-sell agreement.
This agreement is most appropriate for closely held businesses that are organized as a partnership, C corporation, S corporation, limited liability company (LLC), or professional corporation and is most useful for companies with a large group of owners, as the company funds the agreement. This agreement cannot be used for a corporation with only one stockholder nor for a sole proprietorship.
This agreement is most appropriate for closely held businesses that are organized as a partnership, C corporation, S corporation, LLC, or professional corporation. This agreement cannot be used for a corporation with only one stockholder or for a sole proprietorship.
This agreement is most appropriate for closely held businesses that are organized as a partnership, C corporation, S corporation, LLC, or professional corporation. This agreement cannot be used for a corporation with only one stockholder or for a sole proprietorship.
Unlike sole proprietorships, limited liability corporations (LLCs) are expected to have a plan in preparation for the death of the business owner. This plan should outline what happens to the business itself, who can have shares of the company, and who can have managerial interests. Suppose your father is the owner of an LLC and passes away. If you are the sole heir of a business where the LLC owner dies, you can also make choices. Depending on state law or probate court precedent, sole heirs of LLCs can choose to either keep the business going or end it.
The particular way in which the rights of ownership are assigned to owners in the company depends on its legal structure. A business must be set up in one of three ways: as a sole proprietorship, as a partnership, or as a corporation. In a sole proprietorship, business property, liability, and income are treated as the personal property of a single person. These businesses will have to first establish a partnership or incorporate to share ownership with employees.
The basic forms of business organization include sole proprietorship, partnerships, corporations and limited liability companies. Each has its advantages and disadvantages in terms of organizational complexity and transfer perspective. A sole proprietorship is fairly simple. A corporation requires more time and attention to form and maintain. In between are partnerships and limited liability companies, which combine attributes of individual and corporate ownership. From both a management and asset transfer perspective, each offers advantages, depending on the family and business needs of your situation.
Business succession plans are important regardless of your type of ownership. But a plan may be even more important if you are the sole owner of your company. A lot goes into the successful organization and management of a business.
If you do not have a business succession plan in place and you are an unincorporated sole proprietor, this ownership will dissolve with your untimely death. All of the business assets will be combined into the estate and given to the nearest survivor, or whoever is listed in the will. 041b061a72