Entrepreneur Information: What Is a Buy-Sell Agreement?

When it comes to learning entrepreneur information, the buy-sell agreement is one of the most important topics that you could learn about. Here are the basics of the buy-sell agreement.

The Buy-Sell Agreement

This is an agreement that is made between the owners of a business. For example, if you were a partner in a business with someone else, you could potentially agree to sell your shares of the business to your partner for certain price if you die or decide to leave the business. This agreement is also known as a business will. Therefore, it is going to govern what happens in regards to transferring ownership of the business to another party.

Funding the Agreement

Many times, it can be difficult to come up with enough cash to buy out a partner's share of the business. In order to overcome this problem, many businesses utilize life insurance. In order to use life insurance, you are going to have to come up with an amount for the purchase price. For example, let's say that you agreed to sell your share of the business for $100,000 if you die. Your partner could then buy a life insurance policy for $100,000 on you. If you died, she would give that money to your family to gain your portion of the business.

Can buy sell agreements be used to avoid estate taxes?

Using buy sell agreements can be an effective way to avoid estate taxes if the transactions are set up properly. For example, let's say that two business partners had a buy sell agreement in place. When one of the partners passes away, he or she has a life insurance policy that will provide the money to the other partner in the amount that is necessary to purchase the business. The partner can then give that money to the family members of the deceased individual. Since the money is not directly passed from the deceased to the beneficiaries, it will not be counted as part of the estate.

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