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Owning and managing a successful security business can be an overwhelming task. Adding to your concern is a detail that may not be number one on your "to do" list. You want to ensure that you have a ready buyer and a ready source of cash to purchase your share of your alarm business if you have partners.
Probably the most common method of "cashing out" of a business is through a buy-sell agreement with your partner(s). There are various ways to structure the buy-sell agreement, including a stock redemption plan funded with life insurance, where the business buys out your share following a "trigger" event such as retirement, disability or premature death; or a cross purchase plan, also funded with life insurance, where your partner(s) agree to buy out your share. However, there is a new buy-sell concept that utilizes the benefits of tax-free life insurance and the legal protections of a partnership to ensure a smooth transition of a business to the remaining partner(s) following a trigger event.
Under this concept, each of the business partners - plus the business itself - enters into a general partnership agreement. Each partner purchases a life insurance policy in their name and then transfers ownership of the policy to the partnership as their capital contribution. For its part, the business transfers cash to the partnership as its contribution, and the partnership uses that cash to pay the premiums on the life insurance policies. In this manner, there are no income tax consequences to either the partners or the partnership.
Now fast forward several years. One of the partners decides to retire, becomes disabled or is ready to "cash out" of the business. At this time, the partnership would be terminated. Each partner would receive his or her insurance policy, including its cash value, income tax-free. An equal amount of cash value would be transferred from each partner's policy to the business, representing liquidation of its capital account — in essence, the amount equal to the total premiums paid. The retiring partner would then keep their policy as payment of thier share of the business, (if the cash value is insufficient to cover the total purchase price, the balance can be paid with an installment note, commercial loan, or other financing arrangement), while the remaining partners — and the business — would immediately enter into a new partnership agreement. The business would transfer its cash to the new partnership; the remaining partners would transfer their policies; and the partnership would essentially continue as before.
In the event a partner died unexpectedly, pretty much the same thing would occur. The partnership would be terminated; the business would receive a portion of the deceased's death proceeds equal to its capital contribution (premiums paid); the balance of the death proceeds would be paid to the surviving partners or the deceased's family, depending on how the partnership agreement was written; a new partnership would be established; and the process would repeat itself as before.
The end result: Each partner has the peace of mind knowing that, in the event of their death or they become disabled or decide to retire, there will be a ready buyer, and ready cash, to ensure a smooth transition.
This information should not be construed as tax advice applicable to each individual. Please consult a qualified tax advisor regarding your individual circumstances.