A Buy-Sell Agreement Helps You Plan for Contingencies

What would happen to your business if you die, retire, or become disabled? 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 is a contract between the business entity and all the entity's co-owners. The agreement typically covers valuing the business, identifying events that would bring the agreement into effect, and defining the transfer of ownership.

The advantages of a buy-sell agreement include:

  • Providing a framework for a smooth transition of control to successor(s).
  • 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 the estate upon its owner's death.
  • Forces owners to deal with liquidity issues; how would a buyout 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 buy-sell agreement needs to satisfy all parties involved, including the IRS requirements for tax purposes. For assistance with the tax consequences of a buy-sell agreement or a tax review of your current buy-sell agreement, please contact us.