If you`re starting or developing a business with a partner, the composition of a purchase contract isn`t as fun as your next bestseller, but it should be a top priority. This is an agreement that protects you and the company, if something should happen to you or your partner.  In accordance with Regulation 20.2031-2 (h) or Section 2703, a price set in a purchase-sale contract may not be binding on the IRS for inheritance tax purposes. Thus, the estate of a deceased owner is required by the agreement to sell its shares in the business at the contract price, but it may have to declare a higher value for federal property tax purposes and, therefore, pay inheritance tax on that additional phantom value. In practice, the parties must be able to demonstrate that the agreement was intended to offer a fair price in all cases (which can be updated from time to time) and not to play the inheritance tax system. A detailed discussion on the actual requirements of the Regatta. 20.2031-2 (h) and Desart 2703 are beyond the scope of this article. In this case, it may be preferable to purchase company-specific insurance, as the costs are distributed among shareholders based on their proportional interest in the business. On the other hand, the provisions of the Income Tax Act are generally more complex when companies- and there may be complications in terms of creditor protection. In these cases, private insurance is preferable. Among the pitfalls are adapting the life insurance product to redemption needs and thinking over time. In considering which of the many different structures should be used in a purchase-sale contract, several questions should be addressed For example: When it comes to costs, it can be argued that if one shareholder is much older than the others, or is in poor health, the personal ownership of life insurance entails an unequal financial cost to younger and healthier shareholders. Where financial contracts, such as life insurance, are to be used, the requirement to purchase these contracts and a reference to contract numbers or similar information should be included in the agreement.
The most important thing is that in the future it avoids conflicts and disputes that could jeopardize the financial well-being of the outgoing shareholder and/or his family, and even the financial health and financial viability of the company itself, with a contractual exit strategy. A legal agreement minimizes the likelihood of a confrontation between outgoing shareholders and the remaining shareholders or their spouses or families. To the extent that appropriate funds have been reset in the agreement, some cash is set up to cover the normally illiquid shares of a private equity firm.