And Buy-Sell Agreements Explained
The C Corporation may be for you if you plan dramatic massive growth for your business. It is a legally separate entity from it’s shareholders and thus has perpetual life.
It does not dissolve on the death of a shareholder. It gets it’s name from Sub-chapter C of the Internal Revenue Code. It enjoys liability protection from business creditors
In order to get this type of corporation started the principals of the company must file Articles Of Incorporation with the State in which it is located.
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The C Corporation And Life Insurance
The C Corporation pursues business on it’s own behalf, owns property and can enter into contracts. It consists of shareholders and a board of directors which assigns the responsibilities of the principals, officers and employees of the company. Stock can be transferred from one stockholder to another at any time during the stockholders lifetime and even at his or her death.
Debt liability is limited to the assets of the company with no infringement whatsoever on the personal assets of the shareholders. The C Corporation pays Income Taxes on it’s net income after allowable deductions.
Advantages Of The C Corporation
- It enjoys a perpetual life. It does not dissolve on the death of a stockholder.
- Stock is easily transferred from one stockholder to another.
- Limited liability. Liability is limited to the assets of the company. The shareholders assets are in no danger from the debts of the business.
- Shareholders are eligible for tax advantages of group life and health insurance as well as disability and retirement plans within certain limitations.
Disadvantages Of The C Corporation
- It is more difficult to get started than other types of business organizations.
- Income is likely to be taxed twice as the corporation pays taxes on it’s net income and the stockholder must pay taxes on income derived from the corporation.
- Lenders may require personal security from principal stockholders for loans.
- Sale of stock and gifting may allow stock to end up in the hands of persons who make no contribution to the growth of the business.
Life Insurance Applications To The C Corporation
A buy-sell agreement can be set up by the company in order to ensure that the stock remains in the hands of the living stockholders. In the event of the death of one of the stockholders the corporation will buy the shares from the heirs of the deceased. The price is determined by the buy-sell agreement. As this agreement is binding it would be wise for the principals to review it each year.
The most efficient way to fund this agreement is through life insurance. The C Corporation buys an insurance policy on the life of each stockholder for the value of his or her stock. The corporation is the owner and beneficiary of the policy. Upon the stockholders death the proceeds are paid to the company. The company uses the money to buy the shares from the heirs. Alternatively the stockholders can own policies on the other stockholders and use them to fund the agreements.
As term insurance is inexpensive insurance a 10 year term, a 20 year term or a 30 year term may be good to start off with. Whole life insurance may be even better as it lasts forever and it has cash values which can be used to enhance the pension plan of the stockholder at his or her retirement. Other good alternatives are universal life policies and variable universal life policies.
Key Man Life Insurance
Most companies have at least one employee on whose shoulders rests a tremendous amount of responsibility. The absence of this employee can be costly to the corporation. Buying life insurance on the life of such a person is known as key man, or key employee, life insurance. Upon the death of this employee the cash paid by the life insurance company would be used to offset any losses resulting from this employees death.