Business owners looking to sell their operation and who want to ensure their company’s ownership structure is preserved, that its business will continue, and that shareholders will receive a fair and predetermined value for their business interest often opt for buy-sell arrangements. Owners of small, closely held C corporations, sole proprietorships, partnerships and subchapter S corporations turn to buy-sell arrangements to be enacted upon their death, retirement or disability.
These arrangements typically define the terms of the valuation and transfer of shareholder stock by setting a purchase price for the stock ahead of time. Owners who enter into a buy-sell agreement should keep taxes in mind, as employer premiums are not tax-deductible, but life insurance proceeds are generally received on a tax-free basis. For shareholders, there is little or no capital gains tax on the sale of shares at death.
Business owners can reap a number of benefits from buy-sell arrangements, including:
- Protection against the sale of a significant interest in the company;
- Business interests are transferred according to an established plan;
- Business is the owner and beneficiary of the policy;
- Cash values accumulate on a tax-deferred basis;
- Cash values are accessible;
- Plans are simple to establish and administer; and
- Shareholder interests are protected equally.
Shareholders also stand to benefit from such arrangements, including:
- Assurance of a fair price for their interest;
- A guaranteed buyer for the business;
- Sale proceeds provide liquidity for ordinary living expenses and estate tax liability;
- Employer pays the cost of insurance; and
- An agreement negotiated at arm’s length ordinarily fixes the business value for estate tax purposes.