Funded By Life Insurance
One of the most powerful business tools is a buy sell agreement. The proper use of this document can have a direct and dramatic effect on the security of your business.
One of the mistakes an ill informed business owner may make is to fail to prepare for the funding of this instrument.
Let us take a look at how a buy sell agreement is used and why it is so necessary in virtually every type of business whether it be a sole proprietorship, a partnership, or one of the various types of corporations.
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Using A Buy Sell Agreement
- Sole Proprietorships
You have a thriving business that is totally owned by you. As the personal assets of the sole proprietor and those of the business are one the business has to be dissolved upon his or her death. The greatest problem with such a situation is that there will be no more income for the family.
In some cases, however, the business can be purchased from the estate by one of the family members. If this family member has the knowledge and experience to continue the business upon the death of the proprietor an agreement can be set up during the lifetime of the proprietor that would facilitate transfer to this family member.
Some sole proprietorships have a very valued employee that have put a tremendous amount of his or her time and effort into building the business. In such a situation, if the owner has no family member that he wants to have the business upon his death an agreement can also be set up before hand giving this employee the opportunity of purchasing the business from the estate.
The agreement would be funded by life insurance…the least expensive way to go. In the case of the key employee it could be paid for from his salary or the proprietor could choose to pay for it. In some cases the cost is shared by the business owner and the employee. This agreement would be drawn up by an attorney.
- Business Partnerships Or Corporations
A buy sell agreement can be used by a partnership or corporation to distribute shares of deceased partner or shareholder. Although it could be funded using cash or by taking out a loan the best way to go is usually through a life insurance policy.
The life insurance can be owned by each partner or stockholder or it can be owned by the business itself. Upon the death of the shareholder the business buys the shares from the heirs for a predetermined price. The buy sell agreement is binding. The heirs will get a fair price for the deceased stock and each of the surviving partners or stockholders will own additional shares. Everyone involved will be happy.