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The Importance of Buy-Sell Agreements (Part One)

Business advisors and attorneys such as the legal experts at Janathan L. Allen, APC help to prepare a great number of documents for clients, but the buy-sell agreement might just be the most important. This is one of the most complex business documents, and it is far too easy to make mistakes while completing it, so business owners and partners would be foolish to attempt to prepare the agreement without legal counsel.

When business partners come together to form an entity, they become closely entwined with one another. In fact, they become so closely entwined that under certain circumstances, such as if a business partner passes away, the other partner(s) will suddenly be in business with that person's heirs. This is one of the reasons why buy-sell agreements are so important, and why it is so necessary to get professional help while preparing them.

The Facts about Buy-Sell Agreements

There are several things that a buy-sell agreement accomplishes. If you're not sure whether you need one for your partnership, consider the following functions and how they could serve you and your business partners:

  • Acts as an estate planning tool for all business owners involved in an entity
  • Gives business owners a set of protocols for valuing their ownership interests on which they all can agree
  • Offers a means of allocating control of the entity among all the managers and owners
  • Offers S-corporations an extra layer of protection against decisions that could end the S-election status of the corporation
  • Provides closely held businesses with a market for the ownership of their interests
  • Provides Limited Liability Companies (LLCs) and S-corporations with a means of maintaining adequate annual distributions to owners for paying taxes associated with the business
  • Restricts how the ownership interests, such as stocks, can be transferred to protect the close ownership

What This Means for Your Business Partnership

All of the above functions help provide a solid plan and protocol for dealing with situations that could get very messy. With one agreement serving so many functions, however, it's easy for the document preparation to go awry, just like it's easy for business partnerships to go awry without careful planning. Legal service providers, such as San Diego-based Janathan L. Allen, APC, are essential in this process. Bringing up mortality and other delicate issues is hard, but in order for business partnerships to go smoothly, it's necessary to imagine the possibility of a partner's death and prepare an agreement that will stand the test of time.

This is part 1 of a two-part blog series. For more information on buy-sell agreements, please feel free to contact our office at 866-631-3470 for a complimentary, initial consultation.

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