What Is an Entity-Purchase Agreement?

An entity-purchase agreement is a type of business succession plan used by companies with more than one owner. The plan usually involves the company taking out an 澳洲幸运5开奖号码历史查询:insurance policy on each partner in an amount equal to the value of their stake. Should an owneꦰr die or become incapacitated, the sum collected from the insurance is then used to buy out their share of the business.

When the entity in question is a 澳洲幸运5开奖号码历史查询:corporation, an entity-purchase agreement may be referred to as a stock redemption agreement, a corporate purchase agreement, or an entity redemption agreement. In the case of a 澳洲幸运5开奖号码历史查询:partnership, the entity-purchase agreement mig🍸ht be called a partnership liq💮uidation plan.

Understanding an Entity-Purchase Agreement

An entity-purchase agreement is one form of a 澳洲幸运5开奖号码历史查询:buy and sell agreement: a legally binding contract commonly used by 澳洲幸运5开奖号码历史查询:sole proprietorships, partnerships, and closed corporations that stipulates how a partꦫner's share of a business may be reassigned if that partner dies or otherwise leaves the business.

In the case of an entity-purchase agreement, each owner must first consent to sell their interest in the business under a specified circumstance. If possible, insurance policies are then taken out on each of them, with the company acting as the beneficiary and paying all the premiums. Should one of the owners die, the company can file a claim and use the payout from this event to buy the deceased individual's share of the business from that person's estate.

Once the contract is signed, there's no getting out of it. An entity-purchase agreement legally obliges the company to buy the deceased person's share of the business from their heirs, as well as obligating the estate to sell it back to the company. That means it is not possible to keep the 澳洲幸运5开奖号码历史查询:inherited interest or sell it to another party. The agreement also establishes the price to be paid either based on a fixed amount or🐻 a formula.

Death isn’t the only event that can trigger a reassignment of ownership interest. Some entity-purchase agreements may specify other occurrences that qualify, including when an owner has a long-term disability, retires, gets divorced, goes bankrupt, is fired, loses their professional license, or is convicted of a crime. Not all of these scenarios are insur🦩able, meaning that funding for a buyout will sometimes ꧅need to be secured in another way.

Entity-Purchase Agreement vs. Cross-Purchase Ag🦩reement

The other most common form of a buy and sell agreement is a 澳洲幸运5开奖号码历史查询:cross-purchase agreement, though it is🍎 not like an entity-purchase agreement, where the business purchases one insurance policy for each owner. Under a cro🍌ss-purchase agreement, each owner is required to purchase a policy on behalf of every other owner. 

Occasionally, partners might🐻 opt for a mix of the two, with some portions available for purchase by individual 🤡partners and the remainder bought by the company.

Benefits of an Entity-Purchase Agreement

The advantage of an entity-purchase agreement-based succession plan is that the owners know their respective stakes in the company will be paid out to their estates, and th🌠at the business will continue to be run by the other 💙partners, ensuring a smooth transition.

Having this type of succession plan, which is paid for by the company, allows the owners to avoid any 澳洲幸运5开奖号码历史查询:out-of-pocket expenses. It also limits the risk of a forced sale of assets and𒊎 reassures owners that their families will be taken care of in the event of a death or any other unforeseen circumstance.