Buy–sell agreement explained

A buy–sell agreement, also known as a buyout agreement, is a legally binding agreement between co-owners of a business that governs the situation if a co-owner dies or is otherwise forced to leave the business, or chooses to leave the business.[1]

It may be thought of as a sort of premarital agreement between business partners/shareholders or is sometimes called a "business will". An insured buy–sell agreement (triggered buyout is funded with life insurance on the participating owners' lives) is often recommended by business-succession specialists and financial planners to ensure that the buy–sell arrangement is well-funded and to guarantee that there will be money when the buy–sell event is triggered.

Clauses

A buy–sell agreement consists of several legally binding clauses in a business partnership or operating agreement or a separate, freestanding agreement, and controls the following business decisions:

Buy–sell agreement can be in the form of a cross-purchase plan or a repurchase (entity or stock-redemption) plan. For greater neutrality and effectiveness of the buy–sell arrangement, the service of a corporate trustee is recommended.

Profit or loss from a buy-sell agreement may trigger tax conquencess and taxable income.[2]

References

  1. de Frutos, M.-A. and Kittsteiner, T. (2008), Efficient partnership dissolution under buy-sell clauses. The RAND Journal of Economics, 39: 184–198.
  2. Web site: 2024-05-31 . Brooklyn business owner pleads guilty to tax evasion; underreported proceeds from his buyout agreement Internal Revenue Service . 2024-06-20 . https://web.archive.org/web/20240531012623/https://www.irs.gov/compliance/criminal-investigation/brooklyn-business-owner-pleads-guilty-to-tax-evasion-underreported-proceeds-from-his-buyout-agreement . 2024-05-31 .