A buy-sell agreement is the will for the business and it eliminates a lot of difficulties and heartaches when a person dies.  A plan needs to be in place and a method of funding that plan must also be available.  Sole proprietorships, partnerships and corporations all need to consider what happens if the owner or one of the partners or shareholders dies or becomes disabled.  Who will purchase the company or the deceased partner’s or shareholder’s interest?  What is a fair price?  When will the sale be made?

The business itself may also suffer from a supplier’s or creditor’s perception of the value of the deceased person to the success of the business.  Key employees may consider the deceased’s death as a reason to move elsewhere.  There needs to be continuity and a smooth transition in the business when tragic events such as deaths and disabilities occur.  The buy-sell agreement is important to resolve a lot of problems dealing with employees, creditors, suppliers and the deceased person’s family.

WHY DOES A SOLE PROPRIETOR NEED BUY-SELL INSURANCE?

Unless a sole proprietor has a family member or a close relative to turn the business over to and feels comfortable the owner’s desires for his/her family members will be served, the options are limited.  The business can be closed, or it can be sold to an outsider or one or more competent and faithful employees.  The buy-sell agreement to a trusted employee works like this:

• An agreement is prepared which sets forth the employee’s obligation to buy, the price the employee(s) will pay for the business and the method of payment
• The employee takes out a life insurance policy on the owner.  The employee is the owner of the policy, the person who pays the premium and the beneficiary.
• If the owner dies, the death benefits of the insurance policy would be used to buy the business from the owner’s estate.

WHY DOES A PARTNERSHIP NEED BUY-SELL INSURANCE?

Because partnerships are automatically dissolved with the death of one partner, a buy-sell agreement is very important.  The agreement would sell the deceased’s interest in the company to the surviving partner(s) at an agreed price.  Here are some details about the cross-purchase plan.

Cross-Purchase Plan – In this plan each partner buys a life insurance policy on each of the other partners.  The partnership itself is not a participant in the agreement.  Each partner owns, pays the premium payments and is the beneficiary of the insurance policies on the other partners in an amount equal to his share of the purchase price set forth in the buy-sell agreement.   The proceeds are used to purchase the partner’s business interest from the heirs of the deceased.  The number of policies required for a partnership with multiple partners would be:

the number of partners X (number of partners – 1)

For example:  a plan for a partnership with three partners would require six separate insurance policies.  Each partner would need a policy on each of the other parties.

The premiums are not tax-deductible; therefore the benefits are tax free.

Along with our new partner on board, Financial Solutions Link, we are able to conduct a full analysis of your business, whether your are a sole proprietor, corporation, or partnership, and provide solutions for your specific business needs.