The need for business insurance, however, may not be as widely understood but the need is very real. In this series of two articles, we are going to discuss the different structures a business can take and how the various types of business insurance can help protect each of these entities.

The three faces of business

Businesses are generally structured in one of three ways: Sole proprietorship, Partnership, or Corporation. The following are general definitions of each type of business. Specific businesses may differ.

1. Sole proprietorship:

This is considered the simplest type of business structure. It has just one person who individually owns the business and is considered to be self-employed. The business is not incorporated and is not a separate legal entity. There is no tax or legal separation between the business and the owner, as well as no limited liabilities for this business owner. Simply put, the owner and the business are one. The individual (sole proprietor) will file an individual T1 tax return reporting revenue and business expenses. Think of individual service providers or trades person such as hair stylist, massage therapist, plumber, electrician, for example.

2. Partnership:

A partnership is a business that involves two or more people as either individuals or corporations which carry on business with the view of profit. While forming the “Partnership,” an agreement of all partners will specify in detailing the allocated share of business profits to each. Either the individual or corporate partner will be required to file a T1 or T2 tax return respectively for their share of business profits.

A partnership can be either a general partnership or a limited liability partnership (LLP). Depending on the terms of the partnership agreement, a partnership interest can be bought, sold or bequeathed upon death. Some examples of partnerships that work or invest together are chartered public accountants, joint ventures organized as partnerships like in the oil & gas industry.

3. Corporation:

Corporations, which can be both public and private, are treated as separate legal entities under the law. Owners of a corporation are referred to as shareholders and they elect directors who oversee the operations of the corporation. In addition, the directors will appoint officers that hold specific titles and responsibilities such as President or Secretary to implement the corporate policies set by the board of directors. For many small incorporated businesses, the business owner is usually the owner, director & officer.

A shareholder’s liability is limited to the value of the assets that they have transferred to the corporation in exchange for shares, and they may receive corporate profits in the form of dividends. Upon dissolution of the corporation, shareholders would split the assets of the corporation.

Your clients and the need for business insurance

Clients who purchase life insurance from you usually also fall into one of the categories previously mentioned above. It is important to define the objectives for business insurance. The three (3) main type of business insurance that will apply to all business structures and one (1) that applies to partnerships & corporations are as follows:

1. Key person/executive to address stability of human capital.
2. Corporate liabilities to address terms & conditions of the business loans.
3. Business continuity to address revenue erosion & rising operating costs.
4. Partnership/shareholder Agreements to address funding of buy-out

Simply put, business insurance provides immediate cash to address the above-mentioned economic loss that impacts the business after death of the insured.