When you’re in business with one or more partners, you all likely want the business to continue to run smoothly and successfully if you lose a partner to incapacitation or death. A cross-purchase agreement can help you do that.
A cross-purchase agreement is a buy-sell agreement with a life and/or disability insurance policy for each partner that allows the other partners to purchase that person’s shares in the business. That’s accomplished by making the other partners beneficiaries of each partner’s policy(ies). The proceeds are used to purchase the shares that belonged to the person who’s no longer part of the business.
This type of buy-sell agreement typically works best for businesses with just two or perhaps a few partners since it involves at least one insurance policy for each of them. It’s also best for partnerships where all partners are of similar age and health. Otherwise, you’re going to have significant disparities in the prices of the policies. If you’re starting a partnership with a couple of friends from college, for example, it can be a good way to protect the business.
What are the tax advantages?
If a cross-purchase agreement is right for your business, there are some tax advantages. For example, the proceeds aren’t taxable as income and can’t be claimed by creditors since the policies belong to the partners.
This is just one type of buy-sell agreement that can help you ensure that you have a business continuity plan. It’s best to have experienced legal guidance to determine which type is best for your business, to implement it correctly and – when the time comes – to use it.
