Every business or professional relationship you have today or will ever have will eventually end. Businesses fail. Partners move on to other interests. A business partner might become ill or even pass away. Other businesses are sold or merge into bigger companies. It is inevitable that business partnerships end. So, it only makes sense to plan for the end of your business relationship with a partner or partners. That’s what a buy-sell agreement can accomplish.
The Big D’s- Triggering Events
A good buy-sell agreement will contain a list of events or conditions that trigger a right or obligation for one business partner to buy the interests of another partner. Those triggering events usually include one or all of the following:
Death, Disability, Disinterest, Dishonesty and Divorce.
What happens after a Triggering Event?
Once an event triggers, one business partner has an option or an obligation to buy another partner’s ownership. For example, if Bill becomes permanently disabled and can longer contribute to the company’s success, his partner, Carol, would have the right or obligation to buy Bill’s interests.
Who sets the terms of a Buy-Sell Agreement?
Buy-Sell Agreements are negotiated and agreed to by the owners of the company. It is always best to resolve buy-sell agreements early, before any of the owners know whether he or she is likely to be the buyer or the seller.
Other Important Buy-Sell Provisions
Phantom Income Taxation
Most small businesses are “tax flow through” entities, meaning each owner must pay income taxes on her share of the company’s profits, even if the company does not distribute all of those profits in that tax year. “Phantom income” refers to income that is reported on an owner’s tax return but not actually received by that owner as a distribution. A good buy-sell agreement will address “phantom income” and protect owners from taxation without adequate distributions to cover those taxes.
A judge from the Indiana Court of Appeals once commented that the only lawsuits nastier and more expensive than marital dissolution cases are lawsuits between business partners. Buy-sell agreements help to avoid lawsuits between business partners, because these agreements provide predictable results and fewer reasons to seek relief from a court. A good buy-sell agreement may also require mediation or arbitration as other ways of staying out of court rooms.
Every business or professional relationship you have today or will ever have will eventually end. Businesses fail. Partners move on to other interests. A business partner might become ill or even pass away. Other businesses are sold or merge into bigger companies. It is inevitable that business partnerships end. Thus, it only makes sense to […]
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