Article Taxation of Disability Insurance

The success of any business depends on the contributions of each partner or stockholder-employee.  When an owner is no longer able to contribute, either due to death or disability, the business and remaining partners and or owners, can suffer severe financial losses.

Typically, businesses provide for the loss due to the death of a partner, and or owner.  Usually a buy-sell agreement funded with life insurance has been prepared.  Most businesses, however due not prepare for the financial loss due to the disability of a partner, and or owner.

Without a formally funded agreement, the disabled partner, and or owner, would still receive a share of the profits, and could expect to receive a salary.  In addition, a replacement may need to be hired, creating an additional expense.

A business owner usually has a significant amount of capital tied up in the business.  When he or she is disabled and no longer productive, the capital is at risk, giving little or no return.  As a result, the business may become an unmarketable asset.

The remaining business owners may be hampered in making decisions by the dissent of the disabled owner or simply by their personal concern to protect the disabled owner’s investment.

The remaining owners’ efforts to continue to successfully run the business will be diluted by the fact that they will have to share the profits with the disabled owner.

The Buy-Sell Agreement
 

A carefully drawn buy-sell agreement will avoid many problems if one of the owners becomes disabled.  This agreement will provide for the acquisition of the disabled owner’s share, either by the business (ENTITY PURCHASE) or by one of the other owners (CROSS PURCHASE).  It also specifies the price to be paid for the business to the disabled partner.

Guarantees

Guarantees the disabled owner’s interest can be purchased at a specific price.

Guarantees the active owners will maintain control of the business.

Guarantees the disabled owner’s family will not participate in the business.

Guarantees funds to prevent less disruption in cash flow

Guarantees the disabled owner an agreed upon value for his interest

Guarantees the disabled owner no future losses incurred by the business

Guarantees the disabled owner additional funds for medical and living expenses