By Fredrick P.Niemann, a NJ Corporate Lawyer
A buy-sell agreement is one between shareholders of a corporation that states terms and conditions of the sale of a departing individual’s shares in the corporation. These agreements outline specifics such as a price for the departing member’s interest in the corporation, a purchaser for the shares, and the cash for funding the purchase. By agreeing to these terms beforehand, shareholders avoid many of the controversial issues that often arise when a member departs from a corporation and there is no buy-sell agreement in place. These agreements thus provide for not only a less-burdensome sale of interest for departing shareholders, but also a smoother transition for the remaining shareholders as well.
There are two main types of buy-sell agreements. A “redemption” buy-sell agreement is one in which the corporation, as an entity, purchases the shares of the departing member. A “cross-purchase” buy-sell agreement, on the other hand, is one in which the other shareholders personally acquire the shares of the departing members. The corporation as an entity is not involved in a cross-purchase agreement. Hybrid agreements also exist which combine the elements of the two main types.
There are numerous benefits to a buy-sell agreement for shareholders and corporations. By guaranteeing and naming a purchaser for the departing shareholder’s shares, the individual does not have to scramble to find someone to buy them. These agreements also assure the heirs of a deceased shareholder will be given a fair price for the interest in the corporation. Buy-sell agreements can also establish the value of the corporation for estate tax purposes, therefore the fair market value does not have to be determined and there will be no dispute as to the value of the shares between the buyer and seller. By providing the funding for the purchase price, buy-sell agreements allow those involved in the transaction to avoid other unknown financial methods that may be more complicated and not provide instant liquidity for the seller. By guaranteeing continued ownership of the shares, they also assure the remaining shareholders and anyone else involved with the corporation that business will continue to operate as usual and avoid any interruptions a dispute over the transfer would have caused.
As mentioned, buy-sell agreements can establish the value of a corporation for tax purposes. However, the government will defer to such a value only if three strict requirements are followed:
I. The buy-sell agreement must be a bonafied business agreement.
II. The terms of the buy-sell agreement must be comparable to other buy-sell agreements that non-parties have entered into.
III. The buy-sell agreement must clearly not be an attempt to transfer shares to family members for less than full value.
A properly drafted buy-sell agreement is key to future planning for your corporation in New Jersey. When written correctly, they can assure the successful transfer of your corporation while minimizing the disputes typically involved in the transfer of shares of a departing member. If you have an questions regarding the benefits of a buy-sell agreement or would like to talk about planning for the future of your corporation, please call Fredrick P. Niemann, Esq. toll-free at 732-863-990 or email him at fniemann@hnlawfirm.com/. He welcomes all of your inquiries and would be happy to assist you with your NJ corporate matter. For additional information, please go to http://www.youtube.com/user/NJBusinessLaw#p/search/0/ZWx2P0MQWwA to learn more.