Safeguarding Business Stability and Permanency with Using Buy-Sell Agreements
What is a Buy-Sell Agreement and what does it do?
Buy-Sell Agreements document a plan to manage any of the events such as death or simply by choosing to retire for example. Our competitor accountants’ LLC tax return clients tell Business Taxes and More that their accountant never told them about this type of planning. We respond and let them know that an LLC tax return client of ours, or any corporate tax return business, among other entities could face major tax hassles in the future plus financial and legal challenges that would be enormous. It is always less costly and is the prudent thing to plan ahead and set up Buy-Sell Agreements, the benefits are essential and needed. A buy-sell agreement is a legally binding contract and instructs how a partner’s share of a business may be transferred if that partner were to leave the business or died. Many Buy-Selll Agreements direct business shares to be sold back to the organization or the rest of the business members. Here is one example of our LLC tax return buy-sell agreement scenario. One of the members of the LLC tax return that we filed the tax return for LLC a death of a member took place. The member’s estate must agree to sell the business. Since, at Business Taxes and More we take a holistic approach to all of our tax plannings, we had already qualified the dying member for a life insurance policy which was used to fund the purchase of the member’s shares and pay the estate that way.
Generally, there are two kinds of buy-sell agreements the cross purchase and entity purchase agreements. In a cross purchase agreement, the remaining owners or partners purchase the shares of the business that is for sale. In entity purchase agreement which is sometimes called a redemption the business entity purchases the share of the business for sale.
When a sole proprietor dies, a key employee can be chosen as the buyer or successor. In summary, when you file business tax return for example LLC tax return corporate tax return S corporation income tax return or any tax return services for businesses for that matter, be sure to prepare a buy sell agreement. Some of the major benefits of having a buy-sell agreement is that it helps owners direct difficult situations in such manner that protects the business. Here are more examples, a buy-sell agreement prevents a deceased owner’s estate from selling their interests to an outside party. This has been important to all of our LLC tax return corporate tax return S corporation tax return partnerships and small business tax preparation services clients across the board. Many of our LLC tax return and corporate tax return clients, while preparing their buy sell agreements, they also benefited from appraising the value of their businesses. Buy-sell agreement lays out how the business should be valued, what methods should be used.
Key important sections covered in the buy-sell agreement
- A list of activating buyout events
- A list of partners or owners and their current business ownership stakes
- A recent appraisal and valuation of the business’ complete equity
- The sources of funds and a funding instrument, such as life insurance policies
- Tax and estate planning concerns for the partners and surviving beneficiaries
- Some common activating or triggering buyout events include: bankruptcy, death, disability, pledging of an owners’ interest, divorce, termination of employment
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