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Entity Purchase (Stock Redemption) Buy-Sell Agreement

August 18, 2011

John Jastremski Presents:

 

Entity Purchase (Stock Redemption) Buy-Sell Agreement

Definition

The term entity purchase agreement broadly applies to a buy-sell agreement between a business entity and the owners, by which the business entity agrees to buy the interest of an owner at the occurrence of some specified triggering event. In the case of a corporation, it might be referred to as a stock redemption agreement, a corporate purchase agreement, or an entity redemption agreement. In the case of a partnership, the entity purchase agreement might be referred to as a partnership liquidation plan. The entity purchase agreement provides a guaranteed buyer and prearranged pricing and payment methods for an owner’s business interest. In the case of an owner’s death, these arrangements can mean a quick sale and liquidity for the estate.
Prerequisite

  • You own a business with one or more other owners

Key Strengths

  • Includes all the strengths of a buy-sell agreement
  • Can provide a guaranteed buyer for the business interest
  • Can provide liquidity for payment of estate taxes and settlement expenses (especially if agreement is funded)
  • Can avoid potential conflicts of interest
  • Can establish taxable value of the business, if structured properly
  • Can maintain stability of business operations
  • Can improve creditworthiness of the business
  • Can maintain legal status of your S corporation, partnership, or professional corporation (if relevant)
  • Efficient and easier to administer when multiple shareholders are involved
  • Can be easier to fund
  • Proceeds subject to favorable tax status under certain conditions
  • Takes advantage of increase in basis received by owner’s estate on death
  • Remaining shareholders receive percentage increase in ownership without additional investment

Key Tradeoffs

  • Restrictions in the agreement can affect personal estate planning and could limit access to outside credit
  • Favorable treatment of stock redemption may not apply to family corporation due to attribution rules

Variations from State to State

  • Local laws could prevent corporate redemption
  • Community property laws could have impact in cases of divorce

How Is It Implemented?

  • Requires advance planning and determination of goals for business interest
  • Requires legal and tax assistance
  • Requires coordination with estate planning
  • Requires ongoing, periodic reviews once agreement established

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of John Jastremski, Jeremy Keating, Erik J Larsen, Frank Esposito, Patrick Ray, Robert Welsch, Michael Reese, Brent Wolf, Andy Starostecki and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com,  access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

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