If you are buying a business with one or more co-owners, please take our advice and set up a buy-sell agreement. A well-drafted agreement can do these valuable things for you:
Transform your business ownership interest into a more liquid asset
Prevent unwanted ownership changes
Save taxes and avoid hassles with the IRS
Read this article to find out how buy-sell agreements work and the important details to understand. Then huddle with your co-owners, attorney, and tax pro to hash out a buy-sell agreement that suits your situation.
Buy-Sell Agreement Basics
Buy-sell agreements come in two basic flavors:
Redemption agreements (sometimes called liquidation agreements)
When you enter into a cross-purchase agreement, it’s a contract between you and the other co-owners. Under the agreement, a withdrawing co-owner’s ownership interest must be purchased by the remaining co-owners when a triggering event occurs, such as death or disability.
When you enter into a redemption agreement, it’s a contract between the business entity itself and its co-owners (including you). Under the agreement, a withdrawing co-owner’s ownership interest must be purchased by the entity when a triggering event occurs.
Both types of agreements have three main goals. ... Log in to view full article.