What Is Key Person Planning for a Georgia Business?
A key person is any owner, partner, or employee whose death or disability would directly harm the business. This includes a co-owner who brings in most of the revenue, a technical expert the business cannot replace quickly, or a founding partner whose relationships hold the client base together.
Key person planning answers two questions. First: how does the business keep operating if this person is gone? Second: who owns the business interest that person held, and how does the transfer happen?
These are different problems. The first is a cash flow problem. The second is a legal ownership problem. Treating them as one problem is the most common mistake Georgia business owners make.
A key person plan has three components working together: a key man life insurance policy to cover revenue disruption, a buy-sell agreement funded by a separate insurance policy to handle ownership transfer, and an operating agreement that confirms exactly what happens to an owner’s membership interest at death or disability.
Key Man Life Insurance — What It Covers and What It Does Not
Key man life insurance is a policy the business owns on the life of a key owner or employee. The business pays the premiums. The business is the beneficiary. When the key person dies, the business receives the payout.
The purpose of key man coverage is to replace revenue lost during the transition. It can fund the cost of recruiting and training a replacement, cover lost sales during the handoff, and stabilize cash flow while the business adjusts.
Key man insurance does not fund an ownership buyout. The policy payout goes to the business, not to the surviving owners. It does not transfer the deceased owner’s membership interest to anyone. It does not give the surviving partners the money to buy out the deceased owner’s family.
That is a separate policy with a separate purpose. Most business owners do not know the difference until one of them dies.
The Two Buy-Sell Structures — Cross-Purchase vs. Entity Redemption
A buy-sell agreement is the legal contract that governs ownership transfer. It determines who can buy a departing owner’s interest, at what price, on what timeline, and how the purchase is funded. Most buy-sell agreements are funded by life insurance.
There are two insurance funding structures.
Cross-purchase: Each owner takes out a life insurance policy on every other owner. When one owner dies, the surviving owners use the insurance proceeds to buy the deceased owner’s interest directly from the estate. In a two-owner business, this means each owner holds one policy on the other. In a four-owner business, each owner holds three policies, one on each of the other three partners.
Entity redemption: The company takes out a single policy on each owner. When an owner dies, the company uses the proceeds to buy back the deceased owner’s interest, which reduces the total shares or membership units outstanding and increases each surviving owner’s percentage automatically.
Cross-purchase gives the surviving owners a stepped-up cost basis in the shares they acquire, which has federal income tax advantages if they later sell. Entity redemption is simpler to administer in a business with many owners because the company holds fewer policies. The right structure depends on the number of owners, the business entity type, and the tax situation. This is a decision made with the client’s CPA and insurance professional.
Why Key Man Coverage and Buy-Sell Coverage Are Different Policies
Key man insurance and buy-sell insurance are not the same product. They are not interchangeable. They do not serve the same purpose. Almost no competitor in this space explains this clearly. Most treat them as one category called “key person insurance.”
Key man insurance pays the business to replace revenue. The business is the owner and the beneficiary. The payout is unrestricted, and the business can use it for anything during the transition period.
Buy-sell insurance funds the legal transfer of ownership. In a cross-purchase structure, each owner is the policy owner and beneficiary on their partner’s life. In an entity redemption structure, the company owns the policies and uses the proceeds to buy back a deceased owner’s interest at the price set in the buy-sell agreement.
A business that has only one policy, regardless of what it is called, is only solving one of the two problems. If that single policy is key man coverage, the family of the deceased owner still holds the membership interest and no one has money to buy it. If that single policy is buy-sell coverage, the business has no cash buffer during the transition and may fail before the buyout is complete.
A complete key person plan requires both policies, sized appropriately and reviewed regularly.
The Installment Sale Alternative — and Why It Creates Problems
Some buy-sell agreements do not fund ownership transfer with insurance. Instead, they use an installment sale: the surviving owners agree to pay the deceased owner’s estate over time, usually over 5 to 10 years, out of future business revenue.
Installment sales are common in smaller businesses where the owners cannot afford insurance premiums. They create three specific problems.
Cash flow drain: The business must make regular payments to the deceased owner’s estate while also replacing lost revenue, recruiting a replacement, and continuing normal operations. If the key person was a revenue driver, the business is making large payments at exactly the moment its income is reduced.
Performance-dependent payments: If business revenue drops, the surviving owners may be unable to make the scheduled payments. This creates a dispute with the estate, potential litigation, and the possibility that the surviving owners lose the business interest they thought they had acquired.
Interest rate exposure: Installment sales carry a required minimum interest rate under federal tax law. If rates have changed since the agreement was drafted, the economics of the deal shift. The surviving owners may end up paying more in total than the business interest was worth at the time of death.
An installment sale is not always avoidable. But when life insurance is available and affordable, it eliminates all three of these problems by providing the buyout money at death rather than requiring the business to generate it over time.
The Coverage Amount Problem — Policies Set at Signing and Never Updated
A buy-sell agreement sets the purchase price of each owner’s interest. The insurance policy is written to fund that price. Both the agreement and the policy are signed at the same time, typically when the business is formed or when the partnership first comes together.
Here is the problem: most policies are never updated.
A business formed in 2015 with two owners, each holding a 50% interest valued at $500,000 per the buy-sell agreement, might be worth $3,000,000 by 2026. The buy-sell agreement still says $500,000. The insurance policy still covers $500,000. If an owner dies today, the surviving owner receives $500,000 from the policy and owes the estate $500,000 per the agreement, but the actual value of the interest is $1,500,000.
The estate can challenge the buyout price. The surviving owner is left with a choice: pay $1,500,000 out of pocket, accept a lawsuit, or sell the business to fund the difference. None of these outcomes was intended when the agreement was signed.
A buy-sell agreement should be reviewed every 3 to 5 years and after any major change in business value: a large new contract, a merger, a change in ownership percentage, or a significant shift in revenue. The policy coverage should be updated to match the revised valuation at the same time.
The Operating Agreement Must Match the Buy-Sell Agreement
Georgia LLCs are governed by the Georgia Revised Uniform Limited Liability Company Act. The operating agreement is the controlling document for what happens to a member’s interest at death or disability.
Under O.C.G.A. § 14-11-506, when a member of a Georgia LLC dies, the member’s executor or administrator receives only the rights of an assignee, not full membership rights including voting control, unless the operating agreement says otherwise. This means the deceased owner’s family does not automatically gain management authority over the business. They receive only economic rights (a share of profits and distributions).
This default rule protects the surviving owners in the short term. But it creates a different problem: the estate holds a financial interest in the business indefinitely, with no clear mechanism for the surviving owners to buy it out unless the operating agreement requires a mandatory sale.
A properly drafted operating agreement addresses this directly. It restricts the transfer of membership interests, requires a mandatory buyout at death or disability, and references the buy-sell agreement as the mechanism and price formula. Without this alignment, the operating agreement and the buy-sell agreement can conflict. A conflict between the two documents may require litigation to resolve.
The operating agreement is the first line of defense. The buy-sell agreement is the second. The insurance policy funds the buyout. All three must be consistent.
What The Hive Law Does — and What Gets Referred Out
There is consistent confusion in this space about who drafts the documents versus who sells the insurance. Here is the clear answer for clients of The Hive Law.
The Hive Law drafts:
- The buy-sell agreement, including entity type, triggering events, valuation method, and funding mechanism
- The operating agreement review and revisions, confirming the operating agreement aligns with the buy-sell agreement and addresses the O.C.G.A. § 14-11-506 default rules
- Coordination with the client’s insurance professional to confirm the policy coverage matches the buy-sell agreement terms
The Hive Law does not sell or place life insurance policies. Insurance is licensed and regulated separately from legal practice. The Hive Law works alongside the client’s insurance professional or can refer clients to a trusted professional, but the attorney does not sell coverage.
A standalone buy-sell agreement is $1,500–$3,000 depending on the number of owners and the complexity of the triggering events. A full business succession package, which includes the buy-sell agreement, operating agreement review, and planning for what happens to the owner’s personal estate alongside the business, is $8,000–$10,000 flat fee — see the full price breakdown for business owner estate plans.
Georgia has no state estate tax. The plan does not need to account for a Georgia-level estate tax drag on the buyout. Federal estate tax applies only to estates over the current federal exemption threshold. For most Georgia business owners, the plan focuses on income tax efficiency, business continuity, and clean legal transfer. Estate tax minimization is not the primary concern for most Georgia business owners.
Melissa Breyer, Esq. reviews each client’s current ownership structure, identifies the gaps between what the documents say and what the client intends, and tells the client exactly what is missing. The consultation is the starting point.
