Center for Business
& Estate Planning
Transfer of a Business Interest
A buy sell agreement is a contract between the parties engaged in a business. Buy sell agreements are generally entered into between
- shareholders of a corporation
- partners of a partnership
- a sole proprietorship and a key employee
- business owners and the business entity
Some advisors call a buy sell agreement a business person’s will because it provides a market for the sale of the owner’s business interest.
A decedent’s business interest passes at death by the terms of his or her will or by the law of intestacy. This means the surviving owner could become a “partner” of the decedents’ beneficiaries, people who may or may not be interested in the business. Alternatively, to raise money to pay transfer taxes, administrative expenses and debts of the decedent, the estate or the beneficiaries could sell the decedent’s interest to an outside buyer. This may result in the surviving shareholder having strangers as co-owners. This also assumes such a buyer may be found. Generally, it is not easy to find a buyer for a partial interest in a closely held business.
What if a Disability Occurs?
Not only do buy sell plans respond to the needs that arise at the death of an owner, but some buy sell plans provide for the purchase of a disabled shareholder’s or partner’s interest by the company or co-owner(s). Business people know that if one of their “partners” becomes disabled for a long time, such disability may impede the success of the company. A disability buy out solves the problem by having the disabled party’s interest purchased at a predetermined price and at a time agreed to by all the parties.
Buy sell plans take many forms. Each has its own legal, tax and financial ramifications. The key is to find the one that best fits your business and family needs.