If you own and operate a small business, you need to think about what would happen if you were suddenly unable to perform your responsibilities.
Like a lot of small businesses, your business is probably incredibly dependent on you. Your top- to- bottom knowledge and above-average time commitment would make it very difficult to replace you. In the extreme, your business might need to find a successor or be sold.
In the meantime, the company might not be able to conduct itself in its usual fashion, missing opportunities and potentially creating losses that would need to be financed.
Having a life or disability insurance policy to protect your spouse or family in the event you could not contribute in the usual fashion is commonplace. You should give that same consideration to your business.
One way to do that is through key-person insurance.
Key-person insurance (commonly referred to as key-man Insurance) is a life or disability policy placed on the owner, director or employee of a company who is crucial to the business, where the business or a related party (such as a shareholder or lender) is the beneficiary. Such a policy would provide funds to your business to give it time to react to your absence. It could be used to pay off debts (as a lender might insist on) or finance losses.
While it seems fairly practical, it’s not free. Policy costs will likely mirror similar coverage on the personal side but who, how and when it would pay out out is a little more complicated. Why? Taxes. Not surprising, is it?
The deductibility of insurance premiums and taxability of benefits is highly dependent on the type of coverage and the type of payout and beneficiary. It’s not a foregone conclusion that the business would pay the premium. It might be more efficient to pay it personally – again, depending on who the beneficiaries are and how the benefits are paid.
If you have a simple small business, you probably just need a simple key-person policy. Insurance agents who specialize in such policies would be a good bet to turn to, as they likely know the ins and outs and standard structures. A quick call to your accountant never hurts. Your lawyer can probably sit this one out.
Where possible, insure and pay for your personal life policies personally and insure and pay for your key person insurance corporately, and keep it as simple as your business structure allows.
More important, don’t put it off. Think of how hard you have worked and what resources your business would need to deal with your unexpected departure. You wouldn’t want it to fail due to lack of planning, nor burden your estate or employees with an overwhelming challenge.
I wish this advice would add to your bottom line in the short term. It won’t. But it’s the right thing to do when considering the long-term value of a business you have worked so hard to build.
Special to The Globe and Mail
Chris Griffiths is the Toronto-based director of fine tune consulting, a boutique management consulting practice. Over the past 20 years, he has started or acquired and exited seven businesses.
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