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Harborscape
Professional Building
1524 Alaskan Way, Suite 200
Seattle, WA 98101-1514 |
Phone:
206 | 583.0155
Fax: 206 | 343.5759
www.faolaw.com
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Buy-Sell Agreements
How to Dispose of Your Interest in a Closely Held Business: Alternatives
to Buy-Sell Agreements
Estate Planner Mar-Apr 1999
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Selling stock in your closely held business may be difficult due
to a limited market for it. Although buy-sell agreements provide
the way your interest will be bought and sold, alternative methods
allow you to both address these concerns and receive financial benefits
from the company without selling your stock.
A
Few Alternatives
With proper planning, your company can provide you with significant
financial benefits. Here are some alternatives:
Deferred compensation. Under a deferred compensation agreement,
your company can pay you after your retirement or death, either
for services rendered or as payment for recognition of past work.
You and your company can establish a substantial severance package
before you leave its employ. The company can deduct the severance
payments, if reasonable, as a business expense.
Covenant not to compete. Payments your company makes pursuant
to a covenant not to compete can provide additional funds to you.
The company can also deduct these payments as business expenses.
But the covenant must be reasonable in light of all surrounding
circumstances. If the IRS finds the covenant to be suspect, it can
treat the payments as a dividend to you and the company will not
get a deduction.
Benefit plans. Certain retirement plans, such as defined
benefit plans and target benefit plans, can quickly fund large retirement
accounts for older employees. Their structure allows larger payments
to older employees because the payments to younger employees are
projected to continue for a longer period of time. An employee stock
ownership plan (ESOP) acquiring the company's stock can work similarly.
This option may be especially attractive because the gain on the
sale of your stock to the ESOP can be deferred and receive a step-up
in basis at death.
Stock redemption. If your company cannot purchase your interest
for cash on your death or retirement, it can redeem your stock in
exchange for company assets through a taxable transaction. Then
you can either sell the assets or lease them back to the company.
Or, the company can create a market for your stock by paying reasonable
bonuses to your children or other younger employees that they can
use to purchase your stock.
Sale of the company. If the company doesn't have enough cash
to buy you out, the other owners can sell it while remaining involved
through employment and consulting agreements. Or, you could wind
down the business while your children begin a new, similar business.
You receive the accounts receivable of your closed company. In effect,
its goodwill will inure to the benefit of your children's company
without there having been an actual transfer.
Charitable remainder trust. If you are charitably inclined,
you can use your stock in the company to fund a charitable remainder
trust that provides you income and allows you to receive an income
tax deduction for the remainder passing to charity when the trust
terminates. Your children can have a right of first refusal to repurchase
the stock, which may be useful if the charity has no interest in
owning the stock. If income is not your goal, then you can make
an outright gift of stock to the charity and avoid any gain on the
stock gifted while receiving an income tax deduction.
Gifting to children. If you have sufficient other resources,
your stock may be an appropriate asset to establish a gifting program
to your children.
Spin-offs. If you and other owners are concerned about conflicts,
then you may want to consider dividing the company through either
a tax free spin-off, split-off or split-up that allows each owner
to receive a separate part of the business.
Consider
Your Goals
Careful consideration of your goals can help determine how you
should dispose of your closely held business interest. Remember,
though, that any arrangement must reflect a bargained-for agreement
between you and the other parties -- a court will look for this
if a dispute arises later. If you are interested in learning more
about how alternatives to a buy-sell agreement may work for you,
please call us. We would be happy to discuss your situation and
help you determine how to best dispose of your interest in a closely
held business.
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