Buy-Sell Agreement
Three Forms Of
Buy-Sell Agreements Owners Can Use During Interest Sell-Off
Buy-Sell Agreement – This is a vitally important legal document that
persons use to establish their business entity like creating a limited
liability company as a business model.
State statutes mandate that owners must follow its directive and come
into a buy-sell agreement. When you decide to form a limited liability
company (LLC), it’s highly important you have a buy-sell agreement by
the business planning stage.
A Look At Three
Forms of Buy-Sell Agreement
This buy-sell agreement keeps owners from selling off their interest to
a third-party without any kind of written consent of other owners. This
agreement will come in one of three forms:
Entity-Purchase Agreement
– The owner walking away from the business agrees to sell off this
share to the entity, which then gives up ownership interest.
Cross-Purchase Agreement
– This kind of agreement is the easiest form, which generally occurs
when the pull out owner agrees to sell of his/her interest to the other
owners. This is ideal for small businesses with just a couple of
owners. As more owners get into the business, the form can become
uncontrollable. Larger businesses would be better suited with the
entity-purchase agreement.
Hybrid Agreement
– The hybrid agreement is a combination of both the cross purchase and
entity agreements. Generally, the withdrawing proprietor should offer
up his/her ownership shares first to the entity. For whatever reason
the entity decides not to take up the shares, the shares will need to
be offered to additional owners.
Make sure that the ownership documentations are validated with a
restriction of transfer notice, which was designed by the buy-sell
agreement. In the majority of cases, state statutes stipulate that
clear, unambiguous language must be used in all ownership
documentations. Thus, make sure to research what the statute specifies
in your state to ensure language requirements for the ownership
documentation.
A buy-sell agreement that’s been well-prepared will describe in detail
how the interest is going to be sold. It’ll stipulate how much of it
will be sold. It’ll also lay out how the interests are valued, which
will reduce the possibility of owners getting into disagreements.
It’s very possible for unexpected events to come up that could force
the sale of an ownership interest like:
- Death
- Incapability
- Involuntary termination of shareholder disputes
- Liquidation situation
- Bankruptcy
For the most protection possible, owners tend to purchase insurance
policies, which will cover them in such situations.
One can never expect anything that might arise in the future.
Regardless of company’s operation performance, it is possible for the
owner to sell the ownership due to bankruptcy or liquidation, involuntary
dissolution for shareholder disputes, or even worse yet,
death or incapability. For maximum protection, company owners can buy
insurance policies and such circumstances will be covered.
If you are planning to prepare your own buy-sell agreement,
make sure that you have written legal forms signed by you. Any signed
document is legally binding, so consult with your own accountant or
lawyer when in doubt. For easy downloadable forms, go online and search
for Free Legal Forms
and you should be able to find many general legal forms and documents
such as bill of sale, realtor
buy sell agreement and power of attorney.