What Is a Buy-Sell Agreement?

Entrepreneurs have made their mark on the business world, starting everything from social media companies to high-value tech ventures. New businesses spring up daily that are started by either one person striking out alone or a duo who have stumbled upon a brilliant new concept.

As the business evolves, it may become necessary to invite others to join the chain of command to keep the company running smoothly. A buy-sell agreement is a legal document that spells out how people can buy into the business and what happens when they decide to leave. Learn more about this vital business document and how it can prove beneficial to any business venture large or small.

The Basics of a Buy-Sell Agreement 

When a business is founded, it may be a single owner, or it may be a team of investors. No matter how it begins, a founder must account for how others can join the company and how it will affect decision making and shares in it. The agreement is made up of two critical components: buying into the business and getting out. The best time to create this document is at the beginning of the company when people involved are more apt to agree on things. The longer you go without something, the higher the risk that someone will not see the benefit of having this agreement written in a legally binding document.

The Parties

A buy-sell agreement has many parts that function independently and ultimately together. There are agreements between the company as a whole and the people who make up the shareholders (individuals or entities). This is the main buy-sell agreement. It dictates how much a share in the company costs and how it equates to voting rights. It also values the money a person receives upon exiting the business. There are also agreements between individual shareholders holding each other harmless and including things such as a right of first refusal when it comes to buying them out. Sometimes it becomes necessary to include provisions that make this company interest separate property in marriages. This is so that a surviving spouse does not automatically assume the interest in the company should a shareholder die.

Tax Shelters 

A buy-sell agreement has many implications, but a big one is when it comes to preparing an individual’s tax returns. If you do not have this agreement in effect, you may have to pay more taxes as an individual or spouse than you would if you had this in place. It also stops the IRS from possibly seizing company shares or going to other principles of the company for compensation.

Understanding the importance of a buy-sell agreement is critical to a successful company. Check with a business lawyer in Melbourne, FL for more information.

Thanks to the Law Offices of Arcadier, Biggie & Wood for their insight into business law and BuySell agreements.