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Business Structures
To understand better how to advise a business owner, the agent must understand
the three basic ways a business in Canada can be structured. A business will be
one of the following:
A sole proprietorship;
A partnership; or
A corporation.
Sole Proprietorships
A sole proprietorship is a company owned and operated by one person. It
is unincorporated, and the sole proprietor personally owns the goodwill of the
business, all its assets, and all its debts. This is the riskiest form of business
ownership.
A sole proprietorship is terminated by simply ceasing operations or by the sale
of the business. Ceasing operations is simple and straightforward if the business
truly is owned and operated by only one person and has no ongoing
commitments.
Sole Proprietor
A sole proprietor is
the owner of an
unincorporated
business. He or she
owns all the assets
of the business and
is responsible for all
business debt.
LLQP
An owner of a small
store typically would
be a sole proprietor.
The effort devoted to
building the business
can be lost if there is
no plan in place for an
orderly transfer of the
business to another
owner if the sole
proprietor dies or is
disabled.
Business Insurance
Why is getting a fair price important for the business owner selling her business?
A
B
C
D
Partnerships
A partnership is an unincorporated company owned by a group of individuals
who contribute funds towards the business. Every partner is either a limited
partner (basically, an investor) or a general partner (actively involved in the
partnership).
Every partner owns a share of partnership interest, partnership property,
and partnership debt equal to his or her investment in the partnership. A
partnership is terminated by winding-up, dissolution, or the death of a partner. A
partner may choose to depart from the company if he or she is disabled and can
no longer contribute to the company or if he or she wishes to retire.
Risks Facing the Partner
Typically, when a partner leaves a partnership, the other partners step in to
acquire the partnership interest, property, and debt of that partner. The partner
leaving the company risks not receiving a fair price from the remaining partners
for his or her partnership interest.
When a partner dies, there is often a great deal of difficulty for the spouse or
heir to agree on a fair price for the partnership interest and partnership property
with the remaining partners, for the same reasons that a spouse or heir may have
difficulty selling a sole proprietorship. Unrealistic ideas of value may prevail,
and there will be loss-of-income issues to deal with.
Partnership
interest
Partnership interest
is the portion of the
partnership owned by
the partner. It
determines the
financial stake the
partner has in the
firms profits and
losses.
Partnership
property
Partnership property
is the financial,
intellectual or other
property brought into
the firm by each
partner.
Meanwhile the remaining partners run the risk of having the funds available to
make a fair offer, whether to the partner leaving the firm or the spouse or heir. If
the partnership does not have cash on hand, then internal conflict can arise on
how to make the payment.
LLQP
Corporations
A corporation is created in a legal process called incorporation. The legal
process determines the number of shares in the corporation that will be issued
and creates the corporate structure, with a board of directors and officers of the
company.
If the shares are held by fewer than 50 people, the company is a closely held
private company. This type of company is called a Canadian-controlled private
company, or CCPC, when it meets certain requirements. A CCPC gets certain
tax advantages over a public corporation, such as a small-business deduction. A
CCPC may also qualify to be a qualified small business corporation (QSBC), if
certain additional criteria are met. A QSBC has distinct tax advantages for its
share owners, including the owners ability to use the lifetime capital gains
exemption of $750,000 that is available to owners of a QSBC when capital
gains are realized by the sale of QSBC shares.
When company shares are listed and traded on a stock exchange, such as the
Toronto Stock Exchange, the company is a public company.
Companies listed on a
stock exchange like the
TSX are public
companies. Their
share values are widely
available. The value of
shares of a private
company is known only
to its shareowners.
Capital gain
A capital gain is
received when an
investment
classified as capital
property is sold for
more than its
adjusted cost base.
Capital loss
A capital loss is
received when an
investment
classified as capital
property is sold for
less than its
adjusted cost base.
Values of corporate shares rise and fall with the worth of the company
whether the company is private or public. When there is an increase in share
value from the price paid for the share, then the shareowners benefit from a
capital gain; if the share value drops below the price paid then a capital loss
is received by the shareowners. Shareowners do not personally own assets of the
company and they are not liable for company debt.
A corporation is terminated by sale of all the shares to an acquiring interest or
person, bankruptcy, or a declaration by the board of directors.
Business Insurance
Irrevocable
beneficiary
An irrevocable
beneficiary is a person
named as beneficiary
that cannot be changed
to another beneficiary
without the permission
of the irrevocable
beneficiary.
LLQP
I am a partner in a firm of
architects. I applied for and
received a life policy to
ensure my family would
have funds if I died. I
named my husband the
irrevocable beneficiary of
the policy, so that the
creditors of the company
cannot make a claim
against my estate for
money that they are owed.
When an irrevocable beneficiary is named in a life policy, who has control over
major decisions taken by the policy owner?
A
B
C
D
Business Insurance
Buy-sell Agreement
A contract that
specifies the terms
that a buyer and seller
must meet for the
purchase of a business
from its seller.
+ FILE
See file 22
for a case study
on how term
insurance can
fund a buy-sell
agreement.
If permanent insurance is used, the cash surrender value in the policy can be
used to pay the owner for the business when he or she wishes to retire. The
policy is sacrificed, but the owner receives a retirement allowance in the form of
the selling price of the business that otherwise he or she might not have had,
while ensuring a future for the business.
Since the prospective buyer of the business is the policy owner and therefore he
or she has paid the premiums on the policy, the proceeds on death will be
received tax-free.
LLQP
Business Insurance
A criss-cross agreement is . . . ?
A
B
C
D
LLQP
Disability benefits are paid to the business; the business, in turn, uses the benefit
to provide a salary for a replacement for the key person during a period of
disability. The key persons income may be protected during disability by an
individual or group disability policy.
Premiums for key person insurance are not tax-deductible for the business. They
are an expense that can be budgeted, unlike additional salary and replacement
costs that can be incurred by a business if disability should occur without
insurance in place.
Typically, the benefit period for key person disability insurance does not usually
exceed one year, and the elimination period is very brief, so as not to inhibit the
activities of the business in the absence of the key person.
Business Insurance
WATCH
Business
Overhead
Insurance
There are two parties to this contract: the business and the insurer. The business
is the policy owner, the insured, and the beneficiary. The benefit period for a
business overhead policy ranges from six to 36 months. The elimination period
is zero days for an accident claim and between 14 and 90 days for a sickness
claim.
Settling a Claim for Business Overhead Insurance
Business Overhead Insurance is a reimbursement plan that requires receipts be
submitted as evidence for a claim. There is a policy maximum, and qualifying
expenses are reimbursed to that maximum. For example, if a sole shareowner of
a business takes out a $5,000 Business Overhead Insurance policy and then
becomes disabled, he may submit up to $5,000 per month in business expenses
for reimbursement. If his actual business overhead was $7,000, the $2,000
difference between the policy coverage and actual overhead would not be
insured.
If, however, the claim was less than the amount insured, lets say $3,500, the
$3,500 would be reimbursed, and the difference between the amount insured
and the amount of reimbursement, $1,500 ($5,000 $3,500), may be put into
reserve to extend the benefit period of the policy.
Taxation of Benefits
Benefits paid by the insurer to the business are taxable, because the premiums
are tax-deductible. However, allowable business expenses may be deducted.
Copyright 2011 Oliver Publishing Inc. All rights reserved. 101
LLQP
WATCH
Disability buyout insurance