While you are planning your estate, make sure you plan for the future of your business too. A business buy-sell agreement can give you peace of mind about who will succeed you in running any kind of business.
What Is a Business Buy-Sell Agreement (BSA)?
A business buy-sell agreement, or BSA, is a signed legal contract that requires the transfer of an interest in a business when one or more “triggering events” occur. The triggering events are defined in the contract. For example, triggering events could include the retirement, disability, or death of the business owner.
A BSA can transfer an interest in any form of business entity, including a corporation, partnership, or LLC. It can transfer a partial interest in the business or sole ownership. Also, a BSA is effective whether the business has one owner or multiple owners. Keep in mind, however, that some businesses—such as partnerships—have restrictions on transfer written into the partnership agreements. You should review the applicable documents with your lawyer before signing a BSA.
Because it is a legal contract, a BSA is binding on third parties such as heirs and estate representatives of the business owner. Control of the business must pass to the person designated in the BSA, so the business can continue operating after the owner steps down. Further, a BSA can help establish a value for the business that is binding on the IRS for federal estate tax purposes.
Entity Buy-Sell, Cross-Purchase Buy-Sell, and Wait-and-See Buy-Sell Agreements
There are three common formats for a BSA: an entity BSA, a cross-purchase BSA, or a wait-and-see BSA. For an entity BSA, the business entity agrees to purchase the owner’s interest. For a cross-purchase BSA, multiple business owners agree to purchase each other’s interests. A wait-and-see BSA provides the business with a first option to purchase the interest. If the business declines, then the remaining business owner or owners agrees to purchase the interest. In addition, some BSAs are structured as “one-way” buy-sell agreements when the purchaser of the business interest is not currently an owner.
Choosing the right BSA for you requires a consideration of both the tax and the business impact of each format. Seek out legal advice before preparing or signing a buy-sell agreement to maximize the benefits you and your business can receive from this arrangement.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.