Buy-Sell Agreements for Business Partners

A buy-sell agreement settles one question before it becomes urgent: what happens to a partner's share of the business when that partner dies, becomes disabled, gets divorced, goes bankrupt, or simply leaves, and for how much. Every one of those events eventually happens to a two- or three-owner business; a buy-sell agreement is what turns the event into a transaction with a known price rather than a negotiation between a grieving family and the surviving owners, or a solvent business and a bankruptcy trustee who now has a vote in it.

Three choices decide most of what the agreement looks like: who buys (the company itself, the other owners personally, or some mix of both), what it is worth (a formula, an appraiser, or a number the owners update by hand), and who pays for it in advance (life and disability insurance, mostly). A 2024 Supreme Court decision, Connelly v. United States, changed the arithmetic on the first and third of those for a buy-sell funded by company-owned life insurance, in a way every owner relying on one should understand before the next premium is paid.

Death is the trigger every buy-sell agreement has. The ones worth having also cover disability (defined in days, with a physician or an agreed process to certify it, not left to argument), voluntary withdrawal, and the involuntary events that put an owner's share at risk without the owner dying or quitting: divorce, bankruptcy, and a judgment creditor's charging order against the interest. Without a clause for the involuntary events, a judgment creditor or a spouse's divorce attorney can end up with an economic claim on the business, and the other owners find out the hard way that a charging order is a real, if limited, right under state law (the Uniform Partnership Act (1997) gives a judgment creditor of a partner the right to a charging order on that partner's transferable interest, section 504; most LLC acts give the same right against a member's interest). A right of first refusal for the company and the other owners, exercisable before any such transfer completes, is the fix, and it belongs in the same document as the death and disability triggers rather than a separate one.

Under a cross-purchase agreement, the surviving owners personally buy the departing owner's share, usually funded by a life insurance policy each owner personally owns on each other owner. Under an entity-redemption agreement, the company itself buys the share back and cancels it, usually funded by a policy the company owns on each owner. A hybrid or wait-and-see agreement gives the company the first option to redeem, with the other owners obligated to buy whatever the company does not.

The practical difference shows up in two places: how many insurance policies the structure needs, and what happens to each surviving owner's tax basis.

The basis difference matters most on a later sale. An owner who personally buys a departing partner's share under a cross-purchase gets a stepped-up basis in what was bought, equal to the price paid; that lowers any future taxable gain on a later sale of the business. An owner whose company redeems a departing partner's share under an entity structure gets no such step-up personally, since that owner did not buy anything. For a partnership or an LLC taxed as a partnership, section 754 of the Internal Revenue Code narrows that gap somewhat: the partnership may elect to adjust the basis of its own assets when it buys out a departing partner, under section 743(b) for a sale or section 734(b) for a liquidating distribution, something a corporation redeeming its own stock cannot do for its shareholders. It is a partial, not a complete, answer, and the election itself is worth raising with a tax adviser before, not after, a buyout happens.

What Connelly settled is narrow: it was a C corporation's stock, valued for federal estate tax under sections 2031 and 2033 of the Internal Revenue Code, with a redemption funded by company-owned insurance. The opinion does not purport to decide how a partnership interest or an LLC membership interest, bought out under a partnership's own tax rules (sections 736, 741 and 751), should be valued when the buyout is funded the same way. The valuation logic, that an entity's promise to redeem does not by itself reduce the entity's value, reads as though it would extend to a partnership or an LLC taxed as one, and estate planners have treated it that way since 2024, but no reported decision has applied Connelly to a partnership interest directly as of 2026. Until one does, a partnership or LLC that wants certainty, not a reasonable analogy, has the same choice Crown had before its own case: fund an entity redemption and accept the risk Connelly describes, or structure around it with a cross-purchase or a trusteed version of one.

Download the template as a text file: triggers, valuation options, both funding structures, the payment and promissory note terms, and the tax election language, in order. It is general information built from the structure these agreements commonly take, not a document to sign without a lawyer and a tax adviser, both licensed in the owners' state, reading the finished version first, especially the choice between entity redemption and cross-purchase in light of Connelly.