A buy-sell agreement is an integral part to a business with multiple shareholders. If one of the shareholder dies, the agreement outlines what can and will happen to his or her shares, and a prearranged agreement can help to mute or eliminate conflicts during a difficult time for the shareholders and the deceased's family. Without a buy-sell agreement, shareholders often end up in court, which can be a financial drain for the company, and an emotional drain for all those involved in the dispute. The agreement can also specify other situations where disputes may arise, such as retirement, divorce or bankruptcy, and outline terms by which the shares can be sold and who they can be sold to. The main goal of a buy-sell agreement is to prevent disputes over shares before they happen, and ensure the future viability of the company.
There are many considerations a company will make when creating a buy-sell agreement. Your attorney at HSSO will guide you through each area to create the agreement that best suits your company. Each business has their own individual needs, but general topics might include:
- Applicability of Arrangement
- Agreement Type
- Buyout Price
- Funding
- Security
- Loans
- Non-Compete
Shareholders will generally choose between two types of buy-sell agreements: cross-purchase and stock redemption.
A cross-purchase agreement requires each shareholder to buy and insurance policy on all other shareholders. In the event of a shareholder's death, the remaining shareholders can use the life insurance proceeds to purchase the shares of the deceased shareholder. This type of agreement provides many tax benefits to the beneficiaries of the plan. A cross-purchase agreement can become complicated, however, if there are a high number of shareholders (cross-purchasing for 15 shareholders would equal a total of 210 plans), and if the shareholders vary in age and health, there could be large disparities in the premiums of each policy.
A stock redemption agreement allows the corporation to own policies on the shareholders. When a shareholder dies, the company buys his or her stocks with the insurance proceeds. This type of plan is convenient to administer between multiple shareholders, and the corporation absorbs the difference in premiums as opposed to the individual shareholders. This convenience comes at a price, however, as a stock redemption plan suffers higher tax consequences, and the other shareholders retain their original share holdings instead of experiencing the "step up" as a result of a cross-purchase plan.
HSSO will help you evaluate your business and decide on a convenient and secure plan for your shareholders. If your business has uninsurable shareholders, or if a cross-purchase or stock redemption agreement doesn't quite suit your company, our resourceful attorneys will explore all your possible options, including using a shareholder's existing insurance policy, combination funding, investing capital in life insurance, or investing to grow or sustain business operations.
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Creating a buy-sell agreement can not only provide peace of mind, but it can also save your company money in the event of costly dispute resolution or litigation. Talk with your attorney at HSSO today to protect the future of your company with a tailored buy-sell agreement.
Holder Susan Slusher Oxenhandler LLC, Attorneys, 107 North 7th Street, Columbia, MO 65201
