In the event of death, there is a natural conflict of interest between your surviving co-owners (if any) and your heirs. In general, it is in the best interest of your heirs to receive as much money as possible from the company. Similarly, it is generally in the interest of the surviving co-owners to continue the activity without interruption and to minimize liquidation costs. Without prior agreement, the different needs of your heirs and surviving co-owners will likely be the cause of an argument. A purchase-sale agreement can ensure that your plans for your business and heirs are executed as you intended and do not face resistance. Unlike a simple buy-back sale or a Cross Purchase-Buy-Sell, a hybrid agreement offers purchase options to both owners and the business. Either the non-outgoing owners have the first option to buy the interest, or the company has the first purchase option, the second being given to the other owners. This type of purchase-sale contract offers the luxury of flexibility. As soon as a triggering event occurs, the remaining owners can carefully review the company`s capital needs and existing tax laws at the time of the buyout to determine the most appropriate choice for itself and the business.
Companies are governed by a board of directors elected by the shareholders. The Board of Directors is responsible for choosing the executives responsible for the day-to-day affairs of the company. For the election of a director to be mandatory, a certain percentage of shareholders must vote in favour of it. Unfortunately, if this percentage is a simple majority, minority shareholders may lose their say both in the day-to-day operation of the business and in more important decisions, such as. B the sale or non-sale of the business or the merger with another business. This is why it is important to be particularly careful in drawing up the company`s statutes. Ask yourself: what protection do we want to offer to minority shareholders? Under what circumstances should we change the statutes? Are there situations where we need a super majority (66%, 75% or more)? Another option in the choice of directors is to allow each shareholder to choose a director. While this approach may not give any real influence to a shareholder`s decision, it keeps them informed of the actions of the board of directors.
Cross-purchase partnership agreements. Since the value transfer rule can apply to a trust agreement, the “partnership agreement” has become popular. This provision is similar to the trust provision. But instead of creating a trust, the partners form a partnership. The partnership then acquires a single life insurance policy for each shareholder. The partnership agreement should avoid a transfer in the event of value problems, since the transfer of a life insurance policy to a partnership in which the insured is a partner is an exception to the transfer of value rule. However, if the partnership is created exclusively (or primarily) to facilitate the purchase-sale agreement, the IRS cannot respect the validity of the partnership. Although the IRS approved a structured partnership exclusively for financing a buyback agreement in plR-9309021, the IRS then adopted a non-ruling position for the use of partnerships to fund buyback agreements from Proc. 96-12. This article examines the potential benefits and pitfalls of purchase and sale contracts for SME entrepreneurs and provides questions and comments to CSOs in their roles as financial advisors and business experts, which should be taken into consideration when tasked with providing their professional input.
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