What will happen to your business if you die, retire, or become disabled? If you are the owner of a small business, you need a means for the transfer of that business in the event something happens to you. With a “buy-sell” agreement, you are able to plan for many contingencies over which you would otherwise have little control. A buy-sell agreement should establish a price for the business and the method of succession.
The traditional buy-sell agreement is a contract between the business entity and all the entity’s co-owners. The agreement typically covers valuing the business, laying down triggering events that would bring the terms of the contract into effect, and defining the transfer of ownership.
There are many advantages in drafting a buy-sell agreement, including the following:
- Provides a framework for dealing with owner disputes – ensures a smooth transition of control and power to the owner’s successor.
- Facilitates estate planning objectives – can help minimize certain estate taxes and can be structured to take advantage of favorable redemption rules upon death.
- Fixes value for estate tax purposes – includes a method for valuing ownership interests and establishing a fixed value for purposes of taxing the estate upon its owner’s death.
- Forces shareholders to deal with liquidity issues – addresses how a possible buyout would be funded.
- Helps prevent loss of tax benefits – especially for S corporations in which transferred stock could lead to termination of the S election. It can disallow the transfer of shares without the consent of owners.
Something as valuable as the ownership and management of a small business should not be left to chance. The agreement needs to satisfy all parties involved, including the IRS requirements for tax purposes. If you need assistance in drafting a buy-sell agreement or in updating your current buy-sell agreement, please contact us and your attorney.