A buy-sell agreement is a legal binding agreement in which co-owners protect the future of a business. Most commonly referred to as a buyout agreement, both co-owners may decide to sell their part given the situation if one passes away, is forced to leave, or chooses to leave the business.
Buy- Sell Agreement: Without Adequate Funding
While you may already have a buy sell agreement, it does not necessarily protect the future funding for you business. When your partner passes away, you may not have the funding necessary. This could lead you to seek loans. Secondly, you could end up becoming partner with a family member of the deceased owner until you have the capital needed to buy them out. This could add more stress to your financial situation. We have witness this events multiple times. For this reason, we advise our clients on funding a buy-sell agreement with life insurance.
Buy-Sell Agreement: Funded by Life Insurance
On the other hand, a buy-sell agreement that is funded by life insurance, helps fund the sell agreement of a co-owner once he or she passes away. Each co-owner will place each other as full beneficiaries of the life insurance. Thus, if you pass away, the co-owner will receive the life insurance benefits. With that capital he or she will buy out your heirs. This provides a sum of cash to the deceased family, given for their part interest in the business. This can provide stability for the business future.
Type of Business Protection:
A partnership is protected from potentially closing it's doors because the buy-sell agreement not only protects the business but the family members of the deceased owner as well. It provides financial stability for the future of the family, as well as protects the business by not having the families of the deceased owner getting involved in the future affairs of the business.
While a sole proprietorship is not required for a buy-sell agreement with another co-owner. Life insurance can provide funding to cover any financial situations a business may need for the years ahead. If the deceased owner’s family later decides to sell the business, this could leave enough time for its family members to search for a potential buyer.
LLC, S- Corp, C-Corp
For larger corporations, with more than two owners. Life insurance will only pay out the percentage stake the deceased owner has on the corporation. All other stake owners will each get a equal percentage of the beneficiaries in order to buy the stake of the deceased owner.