Updated: Apr 11, 2019
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 decided to sell their part govern the situation if one passes away, is forced to leave, or chooses to leave the business.
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 heir. This also provides a sum of cash to the deceased family, given for their part interest in the business. This will provide financial stability after your death while also providing a better future for the business.
A partnership is protected from any future events. With a buy-sell agreement not only does it protect the business but the family members of the deceased owner. 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 eligible for a buy-sell agreement with another co-owner. Life insurance provides enough funding to cover financial situations a business may need for the years ahead. If the deceased owner’s family later decides to sell the business, this will leave enough time for its heirs 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.