<p>Much of the wealth in this country has been created through the efforts of small business owners.&nbsp; Small business owners are an incredibly hard working group.&nbsp; Often, virtually every waking hour is spent helping the business grow.&nbsp; The family may be involved in the business.&nbsp; No one deserves their wealth more than someone who has overcome the odds and created a successful business.</p> <p>But these entrepreneurs can be a difficult group.&nbsp; They are so tied up in their businesses that they often don't take time to plan.&nbsp; They can be secretive about their affairs and unwilling to trust the fate of their business to "outsiders."&nbsp; And yet, if a business owner fails to plan for his/her eventual death or retirement, or the possibility that they may become disabled, the business owner is literally risking that which he/she holds so dear...the business itself.&nbsp; Buy/sell agreements can help.</p> <p>Simply stated, a buy/sell agreement obligates one party to sell and another to buy some or all of a business interest upon the occurrence of some designated event, typically death, disability and/or retirement.&nbsp; To be most effective, buy/sell agreements should be accompanied by some type of a funding mechanism to provide the buyer with the cash needed to meet the obligation.</p> <p>Life insurance and disability insurance are most often used to fund buy/sell agreements in the event of death and disability, respectively.&nbsp; A cash value life insurance policy can also be used to provide cash to the buyer in the event of retirement.&nbsp; A buy/sell agreement may also be structured to provide for installment payments from the buyer to the seller.&nbsp; A buy/sell agreement can be created for both incorporated and unincorporated businesses.&nbsp; For federal estate tax purposes, the buy/sell agreement must be structured as an arm's length agreement providing for a fair price to be paid.&nbsp; This allows the owners to plan their estates and can reduce the risk of costly valuation disputes among business owners or upon estate tax audit.</p> <p>There are two basic forms for the buy/sell agreement.&nbsp; The first is the cross purchase agreement.&nbsp; Under a cross purchase agreement, the owners of the business enter into the buy/sell agreement among themselves obligating each other.&nbsp; For example, Winken and Blinken are equal shareholders of X Inc.&nbsp; Under the cross purchase agreement Winken and Blinken each agree to buy the other's half of the business in the event of the other's death, disability or retirement.&nbsp; To fund the agreement, each buys a cash value life insurance policy on the life of the other.&nbsp;&nbsp; Upon one of the triggering events, the remaining shareholder will use the proceeds of the policy to carry out their obligation to purchase the business.</p> <p>The cross purchase agreement is very popular with companies having few owners.&nbsp; The surviving owners benefit from an increase in their cost basis when the purchase is ultimately made.&nbsp; The cross purchase agreement becomes more difficult to fund when there are more than two owners. For example, if Winken and Blinken were joined by Nod, a total of six life insurance policies would be required.&nbsp; Also, the premiums on the policy may vary based on the ages and health of the owners.</p> <p>With an entity purchase agreement (also called a redemption agreement), the owners of the business contract with the company itself.&nbsp; The company is then obligated to buy the share of the owner who has died, retired or become disabled.&nbsp; If the agreement is funded, the policies are owned by the company.&nbsp; Redemption agreements can be structured to take advantage of special estate tax rules (Sec. 303) and they may reduce the number of policies required.</p> <p>By utilizing some form of a buy/sell agreement, the small business owner insures the continuance of the business he/she has worked so hard to create.&nbsp; This makes life much easier for the remaining partner(s) in the business as well as the family members.</p> <p>Of course, this brief article is no substitute for a careful consideration of all of the advantages and disadvantages of this matter in light of your unique personal circumstances.&nbsp; Before implementing any significant tax or financial planning strategy, contact your financial planner, attorney or tax advisor as appropriate.</p> <p>This material was prepared by Raymond James for use by Christopher S. Jorgensen of Raymond James Financial Services, Inc. Member FINRA/SIPC.</p> 2009-09-11T22:10:05Z -2.8585 152 6428 true 2 23406 small-business-continuity-plans 0 2009-09-14T08:06:37Z 2009-09-14T15:08:26Z

As entrepreneurs we make many decisions each day in order to run our business effectively, but what happens if we're not there to run it ? How will our families fare ? We need a plan.......

1 2009-09-14T15:08:26Z