Say you’re a co-owner of an existing business.

Or you might be buying an existing business with some other owners.

Or you might be founding a new business with some other owners.

In these scenarios, consider the advantages of putting a buy-sell agreement in place. A well-drafted agreement can do these helpful things:

Transform your business ownership into a more liquid asset

Prevent unwanted ownership changes

Save taxes and avoid hassles with the IRS

Read on to find out how buy-sell agreements work and the most important details to understand. Here goes.

Buy-Sell Agreement Basics

Buy-sell agreements come in two basic flavors:

Cross-purchase agreements

Redemption agreements (sometimes called “liquidation agreements”)

For discussion purposes, we will assume that there are several other co-owners. But the same principles apply if there’s just one other co-owner.

Cross-Purchase Agreement

A cross-purchase agreement is a contract between you and the other co-owners. Under the agreement, the remaining co-owners must purchase the withdrawing co-owner’s ownership interest when a triggering event, such as death or disability, occurs.

Redemption Agreement

A redemption agreement is a contract between the business entity itself and its co-owners, including you. Under the agreement, the entity must purchase the withdrawing co-owner’s ownership interest when a triggering event ... Log in to view full article.