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In order to guarantee a buyer for the interest in a business (particularly a minority interest which may be of very little value to one's heirs), consideration should be given to a lifetime agreement among the business owners as to how to dispose of the business.
Entity Plan
Under an entity plan the corporation (or partnership) buys the interest of the deceased shareholder (or partner). This type of arrangement is often used when there are several owners.
Cross-Purchase Plan
Under this arrangement each surviving shareholder or partner agrees to buy the interest of any deceased business owner.
An attorney should be consulted in deciding which plan is better.
Advantages of Buy-Sell Agreements
Guarantees a buyer for an asset which probably will not pay dividends to one's heirs.
- Can establish a value for federal estate tax purposes which is binding on the IRS.
- Spells out the terms of payment arid is easily funded with life insurance and disability insurance, if desirable.
- Provides a smooth transition of complete control and ownership to those who are going to keep the business going.
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