Sole Proprietorships--The advantade of Buy Sell Agreement

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A sole proprietor is responsible for every aspect of the business, although after a while they may employ others to carry out these duties
The sole proprietor shares many of the same succession problems as the incorporated business, with the added responsibility of being solely responsible for the business and the legal liabilities.
Since the sole proprietor alone receives the after-tax profit, the sale of their business after death is limited to only three options.

1. Family successor or buy-out.
2. Employee buy-out.
3. Outsider buy-out.
The choices of all these option may encounter some problem such as there are no family successor or successor has not such experience to carry on the business or employees and family want to buy out but neither party has the money to take over or , it could be difficult to find an outsider with the cash and the desire to buy-out the company.

The best answer may be to provide for succession of the business with a properly funded, binding buy-sell agreement using the criss-cross method funded by either a direct payment by the life insurance owner or a split-dollar agreement. The insurance proceeds will retain their tax-free status when paid at death.

Life insurance binding buy sell agreement will certainly benefit the family member or employee with limited funds.
1. A properly drawn, funded buy-sell agreement will guarantee the asset value if an employee(s) has shown the interest and the ability to continue the business and the best way to fund the buy sell agreement
a) the employee’s earnings.
b) the employer could increase (bonus) the employee’s wages somewhat in excess of the required premium.
c) the employer could loan the premiums to the employee and increase the life insurance enough to fund the buy-out as well as repay the loan, plus interest at death.
A pre-arranged sale can also be funded by a split-dollar agreement. At death, this agreement provides funds for the buy-sell agreement. At retirement prior to death, the cash surrender value can help provide retirement funds, which are available because the buy-out has commence.

Advantages of the insured employer-employee buy-sell agreement for the proprietor include:
a) a buyer for the business is established.
b) the proprietor is assured that the family will receive a fair price for the business.
c) the business is stabilized. Customers, suppliers and creditors, aware that plans have been implemented for the orderly continuation of the business, may be more favorably disposed toward long-term business dealings with the proprietor.
d) the services of the employee will be retained. Rather than eventually starting a competitive business, the employee will be eager to do a bigger and better job for the present employer.

The employer-employee buy-sell agreement can be advantageous to the estate and heirs
1) the estate receives full value for the business immediately.
2) the estate can be settled promptly and efficiently.
3) the family is relieved of business worries.

There are many benefits to the employee, including:
a) no fear of job loss upon owner’s death.
b) guaranteed funds to purchase the business at exactly the needed time.
c) removal of the burden of principle payments and interest payments typical of all other forms of financing.
d) no need to contend with interference from executors/executrixes who must be chiefly concerned with protecting the interest of the beneficiaries.
e) no danger of being left in the unenviable position of working to create profits for others.
I hope this information will help all sole proprietor understand more of life insurance used in buy sell agreement between employer and their employees.If you need more information please visit my home page at:
http://businessinsuranceiii.blogspot.com/