Business Continuation and Transfer

In the case of the sole proprietorship, the partnership, and the closely held corporation, the problems of business stability and continuation following the death or disability of an owner are critically important to both the family of the deceased owner, the surviving owners, and the employees. In order to understand the role life insurance plays it is necessary to understand the effects that the death or disability of an owner can have on the business.

The law, upon the death of a general partner, dissolves the partnership!

Accounts receivable will bring only a fraction of their normal value, inventory and plant must be disposed of at sacrifice prices, and

 goodwill will be lost        
means of earning a living are gone

The seriousness of the consequences often leads survivors to attempt to continue the business by buying out the interest of the deceased partner and reorganizing the partnership. This procedure is not practicable, however, for two reasons. In most cases, it is not possible to raise the necessary cash. But even if the surviving partners can raise the cash to purchase the interest of the deceased, they have to prove that the price paid for the interest is fair. Their fiduciary status makes this impracticable; in fact, in some states, they are not permitted to purchase the interest, since it in effect involves a trustee's purchasing trust property. In the usual case, it is also impracticable for an heir to become a member of the reorganized partnership or to purchase the interests of the surviving partners. The record of litigation is clear. 

Rather then a buy-sell agreement, lawyers, doctors, and other professions often us an income continuation arrangement. It provides that for a given number of years the business will share a percentage of its profits with the heirs of the deceased or pay a fixed sum for a period of time.

Two agreements may apply in some cases. A buy-and-sell agreement can cover assets, and an income continuation agreement can cover the deceased's share in future earnings. Life insurance is used as the funding method for both types of agreement.

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