Employee Stock Options – The Basics You Should Know to Incentivize Key Employees or Create a Succession Plan

  • by Pat
  • 3 Months ago
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Succession plan

Ownership Transfers are another way to shift ownership in a closely held business as part of a well-designed succession plan.

Most business owners will eventually want to exit their business and either retire or make time for other interests.  One of the ways an owner can accomplish this is by transferring their ownership utilizing a buy/sell agreement.

This article is the fourth in a series that discusses the basics of employee stock options and various plans to reward managers and employees.  If you didn’t catch my first three articles, I recommend you read all of them as well.

A buy/sell agreement allows an owner to freely transfer their ownership interests in the business to someone of their choosing.  The advantages of using this method to transfer ownership includes planning for continuity upon the owner’s retirement, disability or death.

There are two basic types of a buy-sell agreement.

The first is a cross-purchase plan and this is a legally binding agreement between co-owners of a business that determines who can buy a partner’s or shareholder’s share of the business.  This can be open to outsiders or limited to other partners or shareholders.  This agreement also determines what events trigger the buyout and what price will be paid for the partner or shareholder’s interest in the business.

Redemption agreements are the second type of buy-sell agreement and this is a contract between a shareholder and the corporation in which the shareholder agrees to sell all or a portion of his or her shares to the corporation.  This agreement sets forth the terms and price of the shares as well as specific circumstances for the redemption to occur.  Special rules apply when either all or just a portion of a shareholder’s stock is purchased by the corporation.

The buy/sell agreement has been referred to as a business will and typically is funded with life insurance on the participating owners’ lives.  If the stock redemption is funded by a life or disability insurance policy, the corporation pays the premiums, owns the policy and is the policy’s beneficiary.  Keep in mind that redemption plans can be complex and can have unintended tax repercussions if not set-up properly.  Always seek the advice of a good attorney and a tax professional when structuring complex arrangements such as a buy/sell agreement.

For more information on this and other tax and accounting topics visit my website at actservices-inc.com.

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