Financial Planning Considerations for Business Owners

Ownership of a business, whether formed as a corporation, limited liability company, limited partnership or professional corporation, can provide the owner with many financial opportunities both business oriented and personally. The business owner who uses these opportunities carefully, avoiding possible pitfalls, will reap the rewards of financial planning. This article will touch upon some of the general considerations to be addressed when a business owner implements his/her financial plan. They are: life insurance, buy-sell agreements, and the rules regarding transactions between the individual and the business such as leasing and loans.


The essential function of life insurance is to provide for a surviving spouse and children in the event of an untimely death. Because the business owner's estate will often consist of a relatively illiquid interest in the business, life insurance becomes important as a source of easily obtainable cash, which the estate can use to pay taxes and expenses.

In order for the life insurance proceeds to be included in the business owner's estate the policy must be payable to or for the benefit of the estate or the business owner must die possessing "incidents of ownership" in the policy. An incident of ownership is the policy owner’s retention of an economic benefit which includes the powers to change the beneficiary, surrender or cancel the policy, assign the policy, pledge the policy for a loan or borrow against the policy's cash value.

However, depending on the size of the business owner's estate, the policy proceeds may need to be kept out of the estate for estate tax avoidance. In order to accomplish this, the above incidents of ownership must be avoided either by assigning away all incident of ownership to the beneficiary or establishing a trust for the beneficiary's benefit. When an existing policy is transferred, there is a three-year waiting period before the policy proceeds would not be pulled back into the business owner's estate. Therefore, if the goal is to avoid having the policy considered a part of the owner's estate this three-year transfer rule must always be considered.

Life insurance policies are often owned by the business and payable to the business as the beneficiary upon the death of the business owner. The policy proceeds would be available to the business to buy back the deceased owners interest in the business from his/her estate. Without such liquid funds and a buy sell agreement discussed below, the business may not have the financial ability to purchase the business interest from the estate.


Properly drafted a Buy-Sell Agreement serves as a sound business and estate planning tool. A Buy-Sell Agreement is simply a contract between the individual business owners (known as a cross purchase agreement) or between the owners and the business (known as a redemption agreement) which imposes a restriction on the individual owner’s right to dispose of their business interest during their lifetime. At the same time, the agreement also provides a framework for the sale and purchase of an owner’s interest in the business after death. Generally, the agreement sets forth that either the remaining owners or the business is obligated to purchase the deceased owner’s interest from the estate, which is under a similarly binding obligation to sell the deceased owner’s business interest.

Most buy-sell agreements are funded through the purchase of life insurance on the lives of the individual owners which is reduced to cash upon their death. Because of this, it is essential to make a threshold inquiry into the insurability of all concerned before making any decision on the form of the agreement to be used. The uninsurability of a key party may effectively preclude the use of a buy sell arrangement.

Some of the key advantages to using a buy sell agreement include: the price specified in the agreement places a value on the business interest which is essential to an owner’s estate plan; a purchaser is designated in the agreement for what is possibly an otherwise unmarketable business interest; any remaining business owners are protected by giving them the right to prevent the business interest from falling into the hands of outsiders; and a continuity of ownership and management is provided by keeping the business investment in the hands of those who are active and interested in the business and removing it from those who are not.


The leasing of property such as real estate or equipment that is owned by the business owner to the business is one effective way for an owner to take cash out of the company at minimum tax cost. The business’s rental payments can provide a steady stream of income for the owner. As the lease from the business is an asset, the owner may be able to pledge the leasehold as collateral for a loan. The business also benefits as it gets to deduct the fair and reasonable rent it pays to the owner for the use of the building or business equipment.

Another effective and simple way for the business owner to take cash out of the business is by borrowing from the business. Because the owner is not taxed on the receipt of borrowed funds, he or she is economically better off than if an equal amount had been withdrawn as compensation or as a stock dividend or partnership distribution.

As such loans are carefully examined by the IRS, and could possibly be recharacterized as a dividend or distribution, it is essential that at the time the loan is made it is clear that it will be repaid. Therefore, there should be a legally enforceable promissory note evidencing the debt. The strongest evidence of a real obligation to repay is a secured note with a fixed maturity date. Also, every effort should be made to meet the payment schedule set out in the note to avoid any pattern of haphazard repayments.

Susan H. Confair, who is part of Reager & Adler’s Transaction Group contributed this article. She holds a B.S. in Business Administration from West Virginia University and a J.D. from West Virginia University College of Law. Susan’s practice focuses on all aspects of real estate law, estate planning and elder law. She may be reached by calling (717) 763-1383 or via email at

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Harrisburg Magazine Readers' Choice 2011