Am I protected when another shareholder is involved in the business?
A buy/sell agreement is a document drawn up, usually between shareholders, to set out the terms and conditions under which the shareholders can or must dispose of their shares. Some of the common events which may trigger the buy/sell provision include: death, permanent disability, bankruptcy, retirement and disagreements.
If there is more than one shareholder in the business, then it would be best to enter into a shareholder agreement which would set out the agreed upon buy-sell arrangements on death, disability or retirement. In this way it is clear who will end up owning the business.
A key part of the disability buyout is the definition of disability. This definition has to consider the nature of the disability (physical, mental), the extent of the disability (quadriplegic, loss of limb, etc.), the length of the disability (long-term, short-term) and the effect on the owner’s ability to do his job. This may be very difficult to define. Sometimes the definition in the disability insurance policy is used for this purpose, but care must be taking to ensure that this definition is appropriate. Once the definition of disability is agreed upon, the issue of how the buyout will be funded needs to be determined. Without either of these being well thought out, the provision could prove to be unworkable when it is needed most.
Funding the buyout on death with life insurance is usually prudent, since it is relatively inexpensive and it reduces the tax cost on the buyout. Funding the disability buyout with insurance can be done with either a lump-sum disability buyout policy or a periodic payment policy.