Benefits of buy-sell agreements.Small business plays a major role in the health of our economy. In Canada Canada (kăn`ədə), independent nation (2001 pop. 30,007,094), 3,851,787 sq mi (9,976,128 sq km), N North America. Canada occupies all of North America N of the United States (and E of Alaska) except for Greenland and the French islands of , family-owned small businesses employ approximately 4.75 million people, or about 50 per cent of working Canadians This is a list of Canadians. Architects
[ILLUSTRATION OMITTED] Small businesses are often created when one person or a group of people are inspired by a unique thought for a product or service. During the chaos of the day-to-day day-to-day adj. 1. Occurring on a routine or daily basis: the day-to-day movements of the stock market. 2. operations of running your business, during the complexities of meetings with your banker, your financial advisor, your lawyer and accountant, planning for the future is often overlooked. Whether your business is one that goes public, or is eventually sold to a private group inside or outside of your business, you should not overlook the importance of a properly drafted buy-sell agreement buy-sell agreement n. a contract among the owners of a business which provides terms for their purchase of a withdrawing partner's or stockholder's interest in the enterprise. as a planning tool. A buy-sell agreement is a legal document that restricts the disposition of privately held business interests, usually among existing owners, their families, or an employee group. Partners in a partnership or shareholders of a corporation usually execute a buy-sell agreement for one or all of the following reasons: * They want to protect the value of their business interest for their heirs; or * They want to protect the business from interference from beneficiaries of the interest of a deceased deceased 1) adj. dead. 2) n. the person who has died, as used in the handling of his/her estate, probate of will and other proceedings after death, or in reference to the victim of a homicide (as: "The deceased had been shot three times. partner or shareholder; or * They want to provide for orderly orderly /or·der·ly/ (or´der-le) an attendant in a hospital who works under the direction of a nurse. or·der·ly n. An attendant in a hospital. termination of a relationship between the share-holders if there is a future disagreement. Generally speaking, there are basically two types of buy-sell agreements: the cross purchase agreement and the share redemption plan. A cross purchase agreement is a buy-sell agreement that is entered into between partners in a partnership, or among shareholders in a corporation, obligating the surviving partners to purchase the interest of the retiring or deceased partner or shareholder. The agreement will specify a fixed price for the purchase, or set out a formula that specifies how the price is to be determined at retirement or the time of death of the partner or shareholder. In a share redemption plan the agreement is between the corporation and the shareholders and states that the corporation must purchase the interest of a retiring or deceased shareholder at a fixed price or to be determined by an agreed-upon formula included in the agreement. A major consideration with both plans is how to best finance the purchase price. There are a few different options available. These include: borrowing funds; establishing a sinking fund sinking fund, sum set apart periodically from the income of a government or a business and allowed to accumulate in order ultimately to pay off a debt. A preferred investment for a sinking fund is the purchase of the government's or firm's bonds that are to be paid ; or life and/or disability insurance proceeds. Borrowing funds are sometimes difficult to obtain, generally more expensive, and add risk to the current health of the business. Using a sinking fund involves establishing a separate fund and contributing to it regularly in order to build up a cash reserve. This is a slower process and one of the major concerns with this strategy is that if one of the parties dies shortly after the agreement is executed, the reserves in the fund may not be suitable to buy out the interest of the deceased. Because of the drawbacks associated with the previous two options, most buy-sell agreements incorporate a life insurance provision to ensure that sufficient funds are available exactly when they are needed. These insured agreements usually take one of two forms: cross insurance or corporate-owned insurance. [ILLUSTRATION OMITTED] Beneficiaries of cross insurance are the other shareholders. They use the proceeds they receive upon death to purchase the shares of the deceased. More frequently today corporate-owned life insurance Corporate-owned life insurance (COLI) is life insurance on employees' lives that is owned by the employer corporation. COLI was originally purchased on the lives of key employees and executives by a company to hedge against the financial cost of losing key employees to is used to fund cross purchase and share redemption plans. When used to fund a cross purchase agreement, the corporation becomes the beneficiary beneficiary Person or entity (e.g., a charity or estate) that receives a benefit from something (e.g., a trust, life-insurance policy, or contract). A primary beneficiary receives proceeds from a trust or insurance policy before any other. and pays the premiums. Upon the death of a shareholder the corporation receives the proceeds and the funds are then credited to the corporation's capital dividend account. The remaining shareholders then declare a dividend and the funds are used to retire a promissory note promissory note, unconditional written promise to pay a certain sum of money at a definite time to bearer or to a specified person on his order. Promissory notes are generally used as evidence of debt. held by the deceased's estate. This is efficient as the funds flow out free of tax. Tax considerations play a major role in planning for shareholder agreements. The tax treatment of life insurance payments, the availability of the $500,000 capital gains exemption, the valuation of shares, and many other issues must be considered. Clearly, shareholder agreements should always be drafted with proper professional advice as to both legal and tax issues. Jim Nellis, B. Comm See comms. , is a Financial Planning Financial planning Evaluating the investing and financing options available to a firm. Planning includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in the form of a financial plan, and then comparing future performance against Advisor with Assante Financial Management Ltd. He can be reached at 1-800-465-2100 or 665-3244, or by e-mail: jnellis@assante.com. Please contact a professional advisor to discuss your particular circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or prior to acting on the information above. The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd. |
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