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Small business owners should consider what will happen to the business in the event of the death of a shareholder. Typically, corporations will use a Key Man Insurance policy to fund either a Buy-Sell Agreement or Cross-Purchase Agreement among the shareholders. The following are benefits and concerns for each type of plan.

Entity Purchase Buy-Sell Plans Benefits to the Firm

• The firm is to be the owner, premium payor, and beneficiary of policies on the lives of its owners.


• The business is to use the proceeds of the policy to purchase a deceased owner s interest from his or her estate.


• Fair market value of the interest is to be established and liquidity for the owners estate created.


• The business is in a lower tax bracket than owners, effectively lowering the cost of the plan.


• Pooling of premium shares is desired when there is an age disparity among the owners.


• Survivors want a guarantee that funds will be available to purchase shares at the death of an owner.


• Stability is sought. Employees, lenders, customers, suppliers, and shareholders are more confident of business continuation after the death of an owner.


• No unreasonable compensation concerns as in the case when salaries are increased to pay life insurance premiums under a cross-purchase agreement.


• An unwanted forced sale is to be avoided.


• A smooth transition of control is desired.

Concerns for the Company

• Premium payments are nondeductible by the membership.


• The value of the business interest, as specified in the buy-sell agreement, is includible in the Member’s estate.


• Voting power could be unfavorably shifted at a member’s death.


• Insurance cash values and death benefits are subject to claims of company creditors.


• It can result in higher capital gains to surviving owners should interest be sold at a later date because no step up in basis is available.


• The firm s loss of the use of the premium payment.

• There is to be an exchange of business interest for cash/notes among members or third-party buyers.


• Members seek to establish a fair market value for their business interest.


• Members are to be owners, premiums payors, and beneficiaries of life insurance policies.


• Surviving members wish to receive a step-up in basis in acquired interest, possibly resulting in tax savings at a later sale.


• Avoidance of family attribution concerns is desired.


• Life insurance cash values and death benefits are not to be subjected to the claims of company creditors.


• Premiums are to be paid by the firm, through a bonus arrangement, and treated as reasonable compensation to owners.


• An agreement is needed to continue the business after the death of a Member, free of conflicting interests.


• Surviving members want a guarantee that funds will be available at the death of an owner.


• Stability is sought. Employees, lenders, customers, suppliers, and shareholders are more confident of business continuation after the death of members.


• An unwanted forced sale is to be avoided.


• Life insurance proceeds are to be free from income taxation.


• A smooth transition of control is desired.

Concerns for the Company

• The value of business interest as stated in the buy-sell agreement is includible in a members’ estate.


• The member’s loss of use of premium payment.


• Possible unreasonable compensation concerns where salaries are increased to pay life insurance premiums.


• The member may have difficulty in paying premium.

Members of partnerships, owners of sole proprietorships, and officers of family farm corporations, are not covered as employees under Ohio Workers’ Compensation law unless specifically requested.

Ohio’s workers’ compensation system is a mandatory participation system. Companies with one or more employees must pay into the system. Every “employee” who suffers a work-related injury is protected under the workers’ compensation laws. However, members of partnerships, owners of sole proprietorships, and officers of family farm corporations are not considered “employees” under the workers’ compensation laws.

Under Ohio law, partnerships, sole proprietorships, and family farm corporations, that are employers in ohio, may elect to include members of such partnerships, owners of such sole proprietorships, and officers of such family farm corporations, as employees. However, such employers must make such election by submitting written notice to the Bureau of Workers’ Compensation identifying the person to be covered, and providing additional mandatory information. If no such written notice is provided, the person is not covered as an employee, and will not be entitled to workers’ compensation benefits for work-related injuries.

If your business provides information on your deadbeat clients to any one of a number of credit reporting agencies, such as Equifax, Experian, or TransUnion, you are regarded as a “furnisher” under the Fair Credit Reporting Act (“FCRA”).

The FCRA regulates the collection and disbursement of personal credit information and dictates the duties and responsibilities of those who furnish that information, including creditors and debt collectors. As enacted, the FCRA provided near-blanket immunity from common law tort liability (defamation, invasion of privacy, negligence) to furnishers in order to facilitate full and complete reporting. This immunity is slowly eroding, subjecting furnishers to liability for damages for failing to properly investigate a consumer’s dispute and correct inaccurate information.

Enforcement of the FCRA had been left largely to government officials and state Attorneys General. A consumer’s private right of action was severely limited. As the FCRA is amended, more and more consumers are successfully prosecuting their private remedies under the FCRA and increasingly, the target of this is litigation is the furnisher of information that appears on their credit report. Where once a consumer who disputed information on his report had to deal only with the credit reporting agency that published the information, beginning in December, the consumer can dispute negative information directly with the furnisher himself. In either case, when a furnisher is made aware of a consumer dispute they must investigate the claim and verify that the information being reported is accurate or delete it. This validation procedure must generally be completed within thirty (30) days and is the source of the increase in consumer litigation. Rather than a cursory review of the disputed information, I would encourage all furnishers to vigorously investigate a disputed claim before verifying that the negative information is valid. Recent case law has raised the bar for investigations and suggests that verification should occur only when the furnisher has documentation to “conclusively” support the negative report.

FCRA amendments that become effective December 4, 2004 prohibit a furnisher from reporting information that he “knows or has reasonable cause to believe” is inaccurate. If a client disputes his account with your company and provides you with documentation to support his position, prudence would dictate that the item be deleted from any credit reporting agency and your internal record system updated. Many successful consumer complaints are the result of a disputed item reappearing on a credit report months after the dispute was resolved in the consumer’s favor. Though these furnishers passed the investigation and verification test, they failed the FCRA final exam when their internal record-keeping system re-reported the negative and false information with knowledge of the inaccuracy.