Close corporation plans allow surviving shareholders to purchase the outstanding stock of a deceased shareholder. Life insurance policies can aid in the process, with two types available. Premiums cannot be deducted as a business expense, but death benefits do not carry a tax liability. This plan helps maintain stability and prevent outside entities from attempting a takeover.
Close corporation plans are prearranged agreements that allow surviving shareholders to purchase the outstanding stock of a deceased shareholder. In most cases, the agreement will provide the necessary steps to make the purchase, including a formula for determining the number of shares that can be acquired by each of the surviving shareholders. This arrangement helps ensure that the balance of shares between shareholders remains constant.
It’s not unusual for shareholders who want to set up a tight business plan to get the job done with setting up a life insurance policy. There are two basic types of policies that can be created to aid in the business closing plan process. The individual stock purchase plan requires each shareholder to pay a portion of the premium that is considered representative of the total number of shares held by each individual shareholder. This plan tends to work very well if the number of shareholders is relatively small.
A second structure for the insurance policy would be the company’s stock purchase plan. Often employed when the company has a large number of shareholders, premiums associated with each shareholder are paid by the company. The value of the policy is determined by the formula used to determine the guaranteed unit price for each share issued. When a shareholder dies, the de facto company uses the insurance coverage to buy back the shares at the agreed price per share and then offers them for sale to the surviving shareholders.
With both types of insurance coverage associated with the business closing plan, premiums cannot be deducted as a business expense. However, any income generated by the death benefits associated with the policies does not carry a tax liability. This helps ensure that the recipients of the redistributed shares do not incur any penalties for purchasing the shares.
A close-knit business plan can be an excellent strategy when shareholders prefer to keep the financial interest in the company within a select group of investors. The approach helps ensure that outside entities cannot attempt to buy the shares controlled by a recently deceased shareholder and lays the groundwork for an attempted takeover. The close business plan can also help maintain some degree of stability at a time when the company may have to adjust to the death of a key shareholder.
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