Thomas, Richard and Harold (the proverbial “Tom, Dick and Harry” in corporate executives’ clothing) are the sole officers, directors and stockholders of a small but successful service-oriented corporation. During the company’s four years of existence, business has grown steadily. The three men devote their full time to the business and are paid equal annual salaries. When the company was formed, they each invested $100,000, and each owns one-third of the corporate stock. Thomas is married, Richard is a widower with minor children and Harold is engaged to be married. Neither Thomas’ wife nor Harold’s fiancé wants to be involved in the business. Each man asks, “If I die, what will happen to my stock, and how can I best protect my family?”
The participants in this corporation are ideal candidates for a Buy-Sell Agreement. Such a document typically includes the following provisions:
A. The corporation has a right of first refusal on the proposed sale of shares by any shareholder.
B. A shareholder may make gifts of his stock to family members, or may place his stock in his revocable living trust.
C. The corporate stock is evaluated periodically or at the death of a shareholder.
D. Upon the death or disability of a shareholder, the corporation must buy, and the shareholder, his assignee or estate must sell, his stock, at a price agreed or to be determined.
E. The purchase may be funded by a policy of life or disability insurance on the shareholder. If such insurance is not available, or is less than the stock purchase price, the balance may be paid by the corporation, with interest, over a period of years.
F. All spouses consent to the Buy-Sell Agreement. If the stock is transferred to the stockholder’s living trust, probate of this asset will not be necessary upon the shareholder’s death. His family will be assured of a prompt sale of the shares at a fair price.
If you have a significant interest in a small corporation, consider the benefits of a buy-sell agreement. Your attorney and your tax and insurance professionals can help you determine the form and content of an agreement best suited to your needs.
Jerry Kessler practices law in Santa Clarita. You may reach him at 661-255-1001.