Two people start something. It works. Ten years in there’s staff, a lease, equipment, a client list, and a real number attached to the whole thing.
Then one of them dies.
The shares don’t evaporate. They go somewhere. If nothing was written down, they go to the estate, and the estate is usually a spouse who has never run this business and doesn’t want to start now.
So the surviving owner wakes up with a new partner. Or a lawyer acting for one.
The five questions
We put these in front of every co-owner we meet, and it’s rare that anyone has answers to more than two.
How does the business carry on without you? Somebody opens the doors tomorrow. Who is it.
Do you leave your shares to a spouse who has no idea what’s involved in running the place?
Or to children who might not be ready, or willing, or interested?
If the survivors are supposed to buy you out, where does the money come from on the day? Not in principle. On the day.
And if none of that is written anywhere, who decides?
That last one is the real question. Because somebody will decide. It just won’t be either of you.
An agreement is only as good as its funding
Plenty of owners do have a shareholders agreement. Good. Most of them have never checked the second half.
A legal document doesn’t buy anyone out. It says who buys, at what price, on what terms. It doesn’t produce the money.
There are five ways to fund the deal. Start saving for it today. Borrow from a lender. Use current earnings. Sell assets. Or insure it.
Look at the first four honestly. Every one of them needs the business to be having a good year on the worst day of its life. The founder just died, the bank is nervous, the clients are asking questions, and that’s the moment you’re asking the company to produce several hundred thousand dollars in cash.
That’s why the fifth one usually wins. Not because insurance is clever. Because it’s the only one that arrives on time.
The tax bit nobody explains
There’s also arithmetic here, and it’s the part where the accounting background actually changes the answer.
Life insurance premiums generally aren’t deductible. So the money paying them is after-tax money either way. The question becomes whose after-tax money.
Say the premium is $10,000 a year, which is not a large policy for two owners with a real business between them.
Paid personally, at BC’s top personal rate, you have to earn $21,505 to be left with that $10,000.
Paid by a corporation taxed at the small business rate, you have to earn $11,236.
Same coverage. Same insurer. Same cheque arriving at the same office. And a difference of $10,269 in what you had to earn to send it, every single year. Run that policy twenty years and it’s a little over $205,000 of earnings that went to tax instead of premium, purely because of which pocket wrote the cheque.
That’s not a product recommendation, and it isn’t automatic either. Corporate ownership brings its own complications, the premiums differ between shareholders by age and health, and creditor protection works differently. But it’s arithmetic, and it’s usually the deciding factor once someone actually shows it to you.
Three structures, three different tax outcomes
There’s no single right way to do this. There are three common ones and they behave differently.
Criss-cross. Each shareholder personally owns a policy on every other shareholder. On a death the survivors take the proceeds and buy the shares straight from the estate. Simple with two owners. With four it needs twelve policies, and it keeps getting worse.
Promissory note. The company owns the policies. The death benefit credits the capital dividend account, the survivors buy with a note, and repay it with a tax-free capital dividend. One policy per owner. More moving parts, better tax result in a lot of cases.
Corporate redemption. The company owns the policies and redeems the deceased’s shares directly from the proceeds. No notes to write or chase. Simplest of the three, and it lives or dies on the paid-up capital and how the dividend is treated.
Which one fits depends on how many owners there are, their ages, their health, and what the shares are actually worth. It is genuinely a case-by-case answer, and anyone who tells you otherwise is selling a template.
What to do this week
Find the shareholders agreement. Not the email about it. The signed document.
Read the buy-sell clause and see whether it names a price or a formula, and whether that formula still describes a business this size.
Then find out what funds it. If the answer is “we’d figure it out,” you’ve found the gap.
We’ve been reading corporate returns since the early nineties and writing coverage since 2008, which is the only reason this article can hold both halves at once. Most people looking at your agreement only see one of them.
Pull yours out this week. If the funding line is blank, that’s a conversation worth having before it becomes an urgent one.