Probably not and we get it—realistically it’s not the most riveting document you’ve ever set eyes upon, but understanding your arrangement is the first step to ensuring business continuity.
A buy/sell agreement is a contractual obligation between shareholders and their corporation or between a single shareholder and the other shareholders of the corporation that proactively addresses a myriad of known and unknown events. This agreement determines the fate of the company stock in the instance of a triggering event, such as ownership transition, retirement, death, or disability of a shareholder. A well-constructed buy/sell agreement mitigates multiple estate planning problems for the entity owner and serves as a comprehensive guide to protect and preserve the business.
Depending on the business type, number of shareholders, and company stage (e.g., growth or mature stage), buy/sell agreements are structured in various forms:
When the tides get high, hold on! Our proactive approach to business continuity provides a solid strategy to maximize financial return and minimize tax liability.
Here’s an overview of our deep-dive approach into your business continuity plan:
Think of a key person as the equivalent of the ‘golden goose’ of a company. This golden goose may be a partner, majority stockholder, or possess an expertise unmatched by anyone else in the company. When things go according to plan, such as this key individual retires or resigns, it’s easy to minimize the impact. But if the key person dies or is in a debilitating accident, financial risks come crawling out of the shadows.
While mom thinks we’re all great, in terms of management liability, a key person:
*Works at least 30 hours a week in a key person position and has held that position for at least 12 months. Employee can only be insured as a key person under one business entity.
**If the insured is an owner, the business must be in operation for at least one year for fee-for-service businesses and three years for all others.
If your organization employs individuals vital to its success, you may want to consider this coverage for peace of mind knowing that your colleagues, investors, and lenders are protected.
If your business’ key person is rendered completely disabled, key person replacement (KPR) insurance is a valuable tool in mitigating financial depletions during this transition. This coverage is particularly valuable for small to medium sized businesses with highly specialized employees who are not easily replaced.
The company pays the premium and owns the policy that insures the key person in the event of total disability. If the key person is rendered completely disabled, the company receives benefits—usually tax free.
To qualify for total disability, the insured must be unable to perform the substantial and material duties of his/her key person occupation and must not be working in any other occupation comparable in duties or earnings for the business.
Consider purchasing KPR insurance if:
Providing the key employee meets the definition of total disability, depending how the policy is structured, the policy owner receives either a lump sum payment or a combination of monthly and lump sum payments.
Change is inevitable, but we can help mitigate financial burdens from the unexpected. Our experts at BKS Partners can create a comprehensive policy that protects your directors, officers, and management for peace of mind and your bottom line. Reach out to get started today!
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