When people decide to start a business, one can set up a sole proprietorship, one can start a partnership, or one can start a corporation. While the sole proprietor can pass the business along to the family, the partners in a business must decide in advance how each one’s interest in the business will be resolved upon one’s death, disability, retirement, or when one is forced to leave the business.
Each of the partners comes into the business with a set of skills or core competencies which enables the business to thrive. When one of the partners leaves the business, the other has to decide how to continue the business in light of the expertise which is no longer available. They would want to seek another partner with the same qualifications as the one leaving the business.
It takes time to locate a suitable partner and the surviving partner would need money to continue the business so that they would maintain the same profitability as before. Therefore, an agreement must be made as to how to continue the business in view of the loss which the surviving partner would suffer. A buy sell agreement is the way in which the partners could reach a consensus about the management of the business after one of the partners leaves. The buy sell agreement would be funded with life insurance on each of the partners.
The buy sell agreement would outline who could buy the deceased or disabled partner’s share of the business, the value of that share of the business, and the description of the circumstances under which the buy sell agreement would would be exercised. Those reasons could be death, disability, retirement, or a decision of one of the partner to leave the business. This would enable the continuation of the business without economic loss.
Once the partners agree on the circumstances, they would have an attorney prepare the agreement and then purchase life insurance to cover each of the partners lives. When one leaves the business, becomes disabled or expires, the other partner would collect the insurance money. The agreement could be a cross purchase plan in which each buys out the other’s interest in the business, or it could be an entity or stock redemption plan in which the partner’s shares in the business are redeemed. They the other partner would not have to purchase life insurance.
In conclusion, partners can agree on the disposition of the other’s share in the business upon death, disability, retirement, or withdrawal from the business. This would enable the business to continue running smoothly.