How to Protect a Business Partnership in the Event of a Disability

If a working individual were to get hurt or sick, and cannot complete the duties of their profession, a disability insurance policy would help replace lost income. This can be in the form of a group benefit offered by an individual’s employer. It can also be in the form of a personally owned disability insurance policy. This type of coverage is vital to have due to risk - 1 in 4 working Americans sustain a disability on average of 2 - 2.5 years.

For those who run their own business, or have equity in a business, owning group or personal long term disability insurance can ease the financial burden for them and their families in the event of a disability. However, how does a disability effect the business they are apart of? If a disability were to take place, what happens next for the sake of the business itself?

To Start: Ongoing Ownership Responsibilities

Ownership in a business doesn’t simply vanish when an owner or partner becomes disabled. In fact, it can complicate matters. The disabled owner or partner may still retain voting rights, share in profits (or losses), and be responsible for capital contributions or loan guarantees—even if they are not actively running their business. This can lead to internal strain, legal disputes, or financial instability for the company.

Key Questions To Consider

For business owners / partners, here are three key questions to ask:

• Does your partnership agreement address disability?
  A well-drafted agreement should define what constitutes a disability, how long a partner can be inactive before action is taken, and what the buyout provisions are in the event of a long-term disability.

• Is there a disability buyout plan in place?
  Disability buy-sell insurance is designed to fund the buyout of a disabled partner’s ownership interest, allowing the business to retain stability while providing the affected owner or partner with fair compensation.

• What happens to your share of liabilities or loans?
  Many partners & owners personally guarantee practice loans or leases. A disability doesn't automatically absolve them from those obligations, which can create ongoing financial pressure.

---

An Example to Reference

For this example, we will use a physician practice. Consider Dr. Smith, a 42-year-old orthopedic surgeon and 25% partner in a mid-sized practice. After a skiing accident left him unable to operate, his group disability policy replaced just 40% of his income. His partnership agreement lacked clear disability provisions, creating tension with the other partners about his ongoing role and share of profits. Without a disability buyout policy in place, the practice was financially strained trying to balance Dr. Smith’s equity interest with the need to hire a working replacement.

A Solution: Business Overhead Expense (BOE) Disability Insurance

One often-overlooked solution in these situations is Business Overhead Expense (BOE) Disability Insurance. This type of coverage reimburses a disabled partner for their share of the fixed business expenses—which could be rent, utilities, staff salaries, malpractice insurance, and more—during their period of disability.

For example, if Dr. Smith had BOE coverage in place, the policy would have helped pay his portion of the practice’s overhead costs, easing the financial burden on the remaining partners and giving everyone more time to figure out next steps. BOE doesn’t replace personal income, but it buys time and preserves practice stability during a vulnerable transition.

Planning Ahead

A disability can happen to anyone, even the most capable and successful physicians (in this example), but its impact is magnified when ownership is involved. It’s important to think about planning ahead:

• Review and update partnership and or operating agreements regularly.

• Consider individual and business-owned disability insurance.

• Coordinate a plan that includes disability buy-sell and BOE coverage to protect both personal income and the business.
  

Final Thoughts

As a business owner, and especially a business partnership, your stake in the business is more than financial—it's personal. Taking steps to protect that investment now ensures that if the unexpected happens, your business, your partners, and your family are all better positioned to move forward. Updating legal operating agreements, and having the proper risk mitigation policies in place, can help.