Setting Up A Business

Once you have your business up and running, it would be gullible of you to believe that it will always be that way. As the cash rolls in and the customers pour in, your business partners are happier and contended. But the minute you have bad tidings with your business partners, you suffer from bankruptcy or worse. What needs to be done next? Your business is exposed in the event of something like that happening.

However, there is something that can be done.

Setting Up A Business Prenup

Prenup has its place in divorces that average close to 50% of the marriages and keep the pockets of divorce lawyers jingling. While prenups are traditionally in marriages, they have a place in business as well and come in the form of buy-sell agreements that are closely held.

The buy-sell agreements are a legal document that your lawyer will draft. These documents specify what happens in the case of business interest when there is death, retirement, disability, or bankruptcy. If you believe this venture to cost you heavily and leave you bleeding money, worry not, as drafting a buy-sell agreement is standard practice.

The buy-sell agreement is perfect for any business structure, and can be put in place at the start of a business or can be incorporated whenever needed. But the general rule is, the earlier the better- you never know when an eagle will drop a tortoise on you or your business partner’s head.

In the same way that a marriage prenup dictates how the split of assets will happen in the case of separation, a business prenup shows how one would sell the shares of each of the business partners. This is valuable information that you don’t want other family members to have a stake in the business in the event of the untimely events of the business partners. It could be that an ex-spouse comes out of nowhere, and claims ownership, and at a moment’s notice is sitting from across you in the boardroom making decisions!

What About The Capital To Make The Buyout?

If it is agreed for you to take over the stake, then do you have the money to buy the stake? Most of the buy-sell agreements are funded with the purchase of a life insurance policy on each of the partners. You needn’t have to use the funds from a life insurance policy, but it is a fool-proof way to ensure that the funds will be there to make the purchase if the situation demands. Life insurance provides immense leverage.

Term insurance is cheap especially if you are in good health, and this in turn can fund your stake buyout. Working with an insurance broker is a smart option, and zeroing on the right insurance is essential for your business needs.

There are two popular methods for term insurance:

• Entity Purchase

This allows the company to buy the shares of the partner that has passed away but receives no step-up in basis.

• Cross-Purchase

This is where the policies of one another can be owned. In the event of a death, you will receive the funds in order to buy out the other partner with a step-up in basis. This is a tricky method, especially if there are many business owners, as each of the partners has to own the policies of the other.

Lawyering Up

Business Structure

A buy-sell agreement is an important piece of document that you require a lawyer to look over. This won’t take long, and your attorney can get it done quickly enough. What is important is how will you value the business ownership, and what is the action that you will take will an undesirable event occurs. Like everything in business, this is another decision that needs to be made. Down the line, you can save yourself from a lot of trouble if you make the decision now.