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A partnership is fairly simple to set up. Two or more people get together
with the intent of going into business; they get the appropriate licenses
and file the necessary papers with the State and you are in business. When
the areas of expertise of these people compliment each other the situation
is ideal. Although each partner is taxed on an individual basis they all are
liable for the debts of the business.
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The partnership is treated like a separate entity in some
ways as it can own property and execute documents, however, when it comes to
payment of taxes or debt liability the owners are responsible. When a
partner dies the company must be dissolved. If the survivors want to
continue the business they must form a new company.
At the time of the formation of the partnership an
agreement should be drawn up stating the percentage of shares each partner
owns and under what conditions and in what manner shares can be disposed of.
The agreement can be modified later upon the approval of a majority. If
there are problems between partners the agreement is the legal document that
they should be able to fall back on.
Advantages
- Fairly simple and inexpensive to set up.
- Makes going into business with family members easy
and unlimited.
- Capitalizing a business is simpler and stronger when
many people put their resources together.
- Because many people are putting their assets together
the borrowing power is greater.
- Each partner has the unique opportunity of
specializing in their own area of expertise.
Disadvantages
- Unless otherwise stated in an agreement the
partnership must be dissolved upon the death of a partner.
- The remaining partners must purchase or inherit the
shares of the deceased partner unless otherwise stated in an agreement
pertaining to succession.
- A partner can require that the business be dissolved
at any time.
- Cannot take advantage of tax write offs like group
life insurance, disability and health.
- All partners are at risk for liabilities.
- All assets of the partnership are at risk in a
limited partnership.
- If a partner wants to leave the partnership he may
suffer financial loss.
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Life Insurance
Now let us look at how life insurance applies to this type
of business. Let us suppose a partner died or had to leave the partnership
because of disability. This situation could destroy the business, however,
if the business had a properly drawn up buy-sell agreement funded by life
insurance and disability insurance much of the problems would be averted.
Each partner would have a life insurance policy and a disability buy-out
policy on his life paid for by the other partners. Upon the death or
disability of a partner the insurance company pays an amount equivalent to
the value of the shares owned by the deceased. This money is used to
purchase the deceased shares from his heirs.
Whole life insurance has traditionally been used for this
type of business arrangement because of it's permanence but term life
insurance can also be used. A 20 year term or a 30 year term policy would be
be fine.
About the Author:
For more than 40 years Donald has been known for his
extensive knowledge of the life insurance business. He has represented some
of the largest and best life insurance companies in the United States as
well as Canada. His advice is invaluable. Donald's website is: http://www.lifeinsurancehub.net
December 2005
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