Buy-Sell Agreements for California Businesses

By Eric Ridley, attorney, Ridley Law. Updated October 2026.

Estate size this page covers: every size for the contract itself. The Connelly estate tax problem matters once an owner’s estate passes the 2026 federal exemption of $15 million per person, about $30 million for a married couple, and it grows with the company and the insurance on the owners.

A buy-sell agreement decides who buys a departing owner’s interest, at what price and with what money. For a family with a valuable company, the funding structure now decides estate tax as well. In Connelly v. United States, 602 U.S. 257 (2024), a unanimous Supreme Court held that life insurance a corporation collects to redeem a deceased owner’s shares counts toward the company’s value, and an obligation to redeem the shares at fair market value doesn’t offset it. The Connelly estate owed $889,914 more in estate tax as a result. A cross-purchase, where the owners hold the policies, keeps the proceeds out of the company. A price set in the agreement binds the IRS only if it meets the three tests in IRC § 2703(b).

Every business with two or more owners has a buy-sell agreement. Most haven’t written theirs down, so the Corporations Code writes it for them. I draft buy-sell agreements for California LLCs, partnerships, and corporations, and this page covers what goes in one, how the price and the money get settled, and the two technical traps, spousal consent and the life insurance notice rule, that catch owners who used a template.

Do I need a buy-sell agreement in California?

Yes, if more than one person owns the company or you want it to survive you. A buy-sell agreement answers one question in advance: when an owner leaves, who ends up with that owner’s share, and what do they pay for it?

The agreement can be a separate document or a set of articles inside the operating agreement, a partnership agreement, or a shareholders’ agreement. Where it sits matters less than whether the documents agree with each other. A buy-sell clause that conflicts with the operating agreement’s transfer restrictions starts the fight it was supposed to prevent.

People sometimes confuse this with an asset or stock purchase agreement for selling the whole company to an outsider. That’s a different document, covered in my guide to selling a California business.

What happens if my business has no buy-sell agreement?

California’s default rules take over, and they differ sharply by entity type. The LLC rules are the harshest for a departing owner’s family, and the partnership rules are the harshest for the owners who stay.

Event	LLC (no agreement)	General partnership (no agreement)
Owner dies	The member is dissociated, and the estate holds only a right to distributions, with no vote.	The partner is dissociated, and the partnership must buy out the interest.
Owner wants out	The member can withdraw but isn’t entitled to be paid for the interest.	The partner can withdraw, and the partnership must buy the interest unless the withdrawal dissolves it.
Price	No statutory price, because there’s no statutory buyout.	The greater of liquidation value or going-concern value, plus interest.

For an LLC, an individual member is dissociated when the member dies (Corp. Code § 17706.02(f)). After dissociation, any transferable interest the person owned is held solely as a transferee (Corp. Code § 17706.03(a)(3)). Unless the articles or a written operating agreement provide otherwise, a member’s dissociation doesn’t entitle the member to a distribution (Corp. Code § 17704.04(b)).

Put plainly, the family inherits a stake it can’t vote, can’t sell to anyone who wants it, and can’t make the company buy. The surviving members inherit a silent co-owner who is entitled to a share of every distribution they decide to make. Neither side chose that.

A general partnership runs the other way. If a partner is dissociated, the partnership must cause the partner’s interest to be purchased (Corp. Code § 16701(a)). The statutory buyout price uses the greater of the liquidation value or the value of a sale of the entire business as a going concern (Corp. Code § 16701(b)). If no deal is reached within 120 days after a written demand, the partnership must pay its own estimate of the price in cash (Corp. Code § 16701(e)). A partnership that never planned for that payment can be forced to borrow or sell to make it.

A corporation has no general statutory buyout at all. The shares pass to the estate, and the heirs become shareholders with whatever rights the bylaws give them. The one statutory buyout for corporations appears only once a shareholder sues to dissolve the company, discussed in my guide to business divorce and partner buyouts.

Which events should trigger a buyout?

Any event that puts an interest into the hands of someone the other owners didn’t choose, or keeps it with someone who’s no longer contributing. The standard list is longer than most templates carry.

• Death. The most common trigger and the easiest to fund, because life insurance exists for it.
• Disability. Define it. A workable definition ties to an insurer’s determination or to a set number of days unable to work, such as 180 consecutive days, so nobody has to litigate what “disabled” means.
• Retirement or voluntary departure. Say whether the price changes if an owner leaves early, and whether the company can pay over time.
• Divorce. The trigger that protects against a former spouse becoming a co-owner. It needs the spousal consent covered below.
• Bankruptcy or a creditor’s charging order. A charging order lets a creditor collect an owner’s distributions (Corp. Code § 17705.03(a)). The buyout clause lets the company end that arrangement on its own terms.
• Termination of employment or loss of a license. The trigger matters most in a professional corporation, where an owner who loses a license can’t keep holding shares.
• Deadlock. A tie-breaking exit, such as a shotgun clause where one owner names a price and the other must either buy or sell at it.

For each trigger, decide whether the purchase is mandatory or optional. Death usually calls for a mandatory purchase, so the family knows it will be paid. A voluntary departure often calls for an option, so the company isn’t forced to buy when cash is short. A right of first refusal on any outside sale sits alongside all of these.

How is the buyout price set?

By a method the owners pick now, while nobody knows which side of the deal they’ll be on. The four methods below are the common ones in small California companies, and many agreements combine two of them.

Method	How it works	Where it fails
Agreed value	The owners sign a certificate of value every year.	Nobody updates it, and a five-year-old number controls.
Formula	A multiple of earnings, revenue, or book value, set in the agreement.	The multiple stops matching the market, or book value ignores goodwill.
Appraisal	One appraiser, or one per side with a third to break the tie.	It takes months and costs real money, but it’s the most defensible.
Hybrid	Agreed value if updated within a set period, appraisal if not.	Rarely fails. It’s usually worth it.

Three details decide more money than the method does. The first is the valuation date, usually the date of the triggering event. The second is whether a minority or marketability discount applies, which on a minority interest can cut the price substantially. The third is whether life insurance proceeds count as a company asset, which the Connelly case discussed below made a live question. For how appraisers approach a small company, see my guide on valuing a California small business.

A family business carries one more rule. For federal estate and gift tax, a price set in an agreement is disregarded unless it’s a bona fide business arrangement, isn’t a device to pass property to family for less than full value, and has terms comparable to an arm’s-length deal (IRC § 2703(b)). The regulations treat those tests as met when more than 50 percent of the interests subject to the agreement are owned by people outside the owner’s family (Treas. Reg. § 25.2703-1(b)(3)). A parent and child who fix a low price to shrink the parent’s estate shouldn’t expect the IRS to accept it.

When does the price in a buy-sell agreement bind the IRS?

Only when it passes all three tests in IRC § 2703(b), enacted in 1990, plus two older rules from case law and the regulations. Under IRC § 2703(a), property is valued for estate and gift tax without regard to an option or agreement to buy it below fair market value, or any restriction on the right to sell it. Subsection (b) is the way out, and the agreement has to meet each of its three requirements.

1. A bona fide business arrangement

   Keeping a company in the hands of the people who run it usually qualifies. In Estate of True, the IRS didn’t contest the business purposes the Tax Court found, and the price still failed under the pre-1990 version of the next test, the bar on passing value to family for less than full price.

2. Not a device to pass value to family for less than full price

   The regulations say the tests must each be met independently, so a real business purpose doesn’t prove the price isn’t a device to shift value to the family (Treas. Reg. § 25.2703-1(b)(2)).

3. Terms comparable to an arm’s-length deal

   The test is whether unrelated parties in the same business could have struck the same bargain. Isolated comparables don’t establish general business practice (Treas. Reg. § 25.2703-1(b)(4)).

There’s a safe harbor. The three tests are treated as met when more than 50 percent by value of the property subject to the restriction is owned by people who aren’t members of the transferor’s family, and their interests are restricted to the same extent (Treas. Reg. § 25.2703-1(b)(3)). A company owned by two unrelated founders usually qualifies. A company owned by a parent and children never does.

Two older rules still apply on top of § 2703. The price has to be fixed and determinable, and the agreement has to bind the owner during life as well as at death. The estate tax regulations give little weight to a price in an agreement that left the decedent free to sell at any price during life (Treas. Reg. § 20.2031-2(h)). The Tax Court applied both older rules alongside § 2703 in Estate of Amlie.

Section 2703 governs agreements entered into, or substantially modified, after October 8, 1990 (Treas. Reg. § 20.2031-2(h)). A substantial modification is treated as creating a new restriction on the date of the change (Treas. Reg. § 25.2703-1(c)(1)), so amending an old family agreement can bring it under the stricter test.

Valuation formula traps

• A price that leaves out the insurance. If the formula excludes policy proceeds the company collects, the estate tax value can include them anyway. That gap is what the Connelly estate paid tax on.
• Book value. The True family’s agreements priced every company at tax book value, which ran far below what the businesses were worth. The courts disregarded the price for estate and gift tax and upheld penalties.
• An agreement nobody follows. Crown’s agreement called for an outside appraisal, and the family agreed on $3 million between themselves instead. A price the owners didn’t follow at death is a weak candidate for a price that binds the IRS.
• A stale agreed value. A certificate of value signed years ago is the easiest number for the IRS to attack, and a later amendment can restart the § 2703 clock.
• Freedom to sell at any price during life. If an owner could sell to anyone at any price while alive, the death price carries little weight.
• Discounts that don’t match. A price with a minority discount, paired with an estate tax value without one, leaves the estate taxed on value it never collects.

How is the buyout funded: cross-purchase or entity redemption?

The agreement is only as good as the money behind it. The two structures differ in who buys: in a cross-purchase, the surviving owners buy the interest personally, and in an entity redemption, the company buys it back.

Question	Cross-purchase	Entity redemption
Who owns the life insurance?	Each owner owns a policy on each other owner.	The company owns one policy per owner.
Number of policies	Grows fast. Four owners need twelve policies unless a trust or separate LLC holds them.	One per owner.
Premium risk	An owner who stops paying leaves a gap.	The company pays, so the policies stay in force.
Tax basis for the survivors	The buyers get a cost basis in the shares they buy.	The survivors’ basis doesn’t rise, though their percentage does.
Estate tax value after Connelly	Proceeds go to the owners, outside the company.	Proceeds are a company asset that raises the deceased owner’s share value.

What Connelly changed

Two brothers owned a building supply corporation, and the company carried $3.5 million of insurance on each to fund a redemption. The Supreme Court held that the company’s obligation to redeem the deceased brother’s shares at fair market value didn’t offset the insurance proceeds, so the proceeds counted in valuing the shares for estate tax. The IRS figure for the brother’s shares came to about $5.3 million instead of the $3 million the family was paid. The Court noted that a cross-purchase agreement would have kept the proceeds out of the company.

Take a California example. Two owners of an Oxnard HVAC company each own half, the company is worth $2,000,000, and the company owns a $1,000,000 policy on each. When one dies, the company holds $3,000,000 of value at the moment of death. Applying Connelly, the IRS would start from the $3,000,000 figure, which puts the estate’s half near $1,500,000 for estate tax, even though the agreement pays the family $1,000,000.

That gap produces a tax only for an estate over the federal exemption, $15,000,000 per person in 2026. California has no estate tax of its own. Most small-business owners won’t owe anything, but an owner with a valuable company plus real estate and retirement accounts should run the numbers with a CPA before choosing redemption.

Other ways to fund it

• Installment notes. The buyer pays over five to ten years, with interest and a security interest in the purchased interest. Notes are the usual answer for retirement and voluntary departure, where insurance doesn’t pay. See my guide to installment sales.
• Disability buyout insurance. A separate policy that pays a lump sum after a waiting period. The agreement’s disability definition should match the policy’s.
• A sinking fund. Cash the company sets aside. It works for small amounts and rarely for a full buyout.

If you switch from redemption to cross-purchase by moving existing policies, watch the transfer-for-value rule. A policy transferred for value loses part of its income tax exclusion, but the rule doesn’t apply to a transfer to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer (IRC § 101(a)(2)). Notice what’s missing from that list: a co-shareholder. Selling a policy from a corporation to a fellow shareholder of the insured doesn’t fit an exception. Many cross-purchase conversions route the policies through a partnership or LLC.

Connelly v. United States (2024): the facts, the numbers, the holding

Brothers Michael and Thomas Connelly owned Crown C Supply, a building supply company in St. Louis. Michael held 77.18 percent and Thomas 22.82 percent. Their agreement gave the surviving brother the first option to buy the deceased brother’s shares and required the corporation to redeem them if he declined. Crown bought $3.5 million of life insurance on each brother to fund that obligation.

Michael died in 2013. Thomas declined to buy, so Crown had to redeem. Although the agreement called for an outside appraisal, Michael’s son and Thomas agreed that the shares were worth $3 million, and Crown paid that amount from the insurance proceeds. The estate tax return reported the shares at $3 million.

On audit, the estate’s appraiser valued Crown at $3.86 million, leaving out the $3 million of proceeds on the theory that the redemption obligation offset them. The IRS added the proceeds back, valued Crown at $6.86 million, valued Michael’s 77.18 percent at about $5.3 million, and assessed an additional $889,914 of estate tax. The estate paid and sued for a refund, and it lost in the district court and the Eighth Circuit.

The Supreme Court affirmed unanimously in an opinion by Justice Thomas. A redemption at fair market value doesn’t change any shareholder’s economic interest, so a willing buyer of Michael’s shares at his death would have paid for a 77.18 percent stake in a company worth $6.86 million, with the insurance cash inside it. The estate tax values what the decedent owned at death, before the company spent the money on the redemption. The Court noted the brothers could have used a cross-purchase agreement, which would have sent the proceeds to Thomas instead of to Crown.

In a footnote, the Court said it wasn’t holding that a redemption obligation can never reduce a company’s value, and gave the example of an obligation that forces a company to sell operating assets to pay for the shares. It rejected the idea that every redemption obligation is an offsetting liability. The Eleventh Circuit had taken the opposite approach in Estate of Blount (2005), and the Crown appraiser had followed it. After Connelly, that approach is gone.

The Connelly numbers, computed

Every figure below comes from the opinion. Row one is the deal Crown made. Row two assumes Thomas owned the policy and bought the shares himself for the same $3 million. Row three asks how big a policy Crown would have needed to pay the estate full value under the Court’s method, since every dollar of insurance raises the value of the shares it buys. That’s the problem Thomas raised in his brief and the Court answered by pointing to a cross-purchase.

Row three shows the trap in a redemption. Because the proceeds raise the value of the shares they’re meant to buy, a company funding a 77.18 percent redemption entirely with insurance would need a policy of about $13.05 million to keep up with itself. In a cross-purchase the policy sits outside the company, so the $3 million buys a stake worth about $2.98 million.

Cross-purchase, redemption, or an insurance LLC after Connelly

Each structure moves the same money through a different owner, and for a family with an estate tax problem the owner of the policy is what decides the tax.

Two rules shape the insurance LLC and trusteed versions. When a corporation owns a policy on a controlling shareholder and the proceeds are payable to the corporation, the regulations don’t attribute the corporation’s incidents of ownership to the shareholder, and the proceeds are considered in valuing the stock instead (Treas. Reg. § 20.2042-1(c)(6)). There’s no matching safe harbor written for an LLC that exists to hold policies on its own members. And IRC § 101(a)(2)(B) lists the transfers that escape the transfer-for-value rule: to the insured, to a partner of the insured, to a partnership in which the insured is a partner, and to a corporation in which the insured is a shareholder or officer. Anything else, including a sale of a policy to a co-shareholder, needs another way to fit.

The buy-sell agreement is one piece of a larger plan for an owner with a taxable estate. If estate tax is still owed on a closely held business interest, Section 6166 deferral may let the estate pay it over time. An owner expecting an outside sale should read estate planning before selling a business, and the wider set of tools is on my ultra-high-net-worth estate planning page. Structures that look good on paper and fail in court are collected in estate planning strategies that backfire.

Buy-sell cases won and lost

Why does my spouse need to sign the buy-sell agreement?

Because in California your spouse probably owns part of what the agreement restricts. All property a married person acquires during the marriage while living in California is community property, unless a statute says otherwise (Fam. Code § 760). An LLC interest bought or built during the marriage usually qualifies.

The spouse who runs a business that is all or substantially all community personal property has primary management and control of it (Fam. Code § 1100(d)). That lets the owner-spouse sign the operating agreement. It doesn’t settle what happens to the other spouse’s half at a divorce or a death.

At a divorce, the court divides the community estate equally unless the spouses agree otherwise in writing or by stipulation in open court (Fam. Code § 2550). At the death of a married person, one-half of the community property belongs to the surviving spouse (Prob. Code § 100(a)). A provision for a nonprobate transfer of community property at death, signed by a married person without the spouse’s written consent, isn’t effective as to the nonconsenting spouse’s interest (Prob. Code § 5020).

So a buy-sell agreement signed only by the owners leaves an argument open: the non-owner spouse never agreed to the transfer restrictions, the price, or the forced sale. A spousal consent closes it. In it, the spouse acknowledges reading the agreement, agrees that any community interest the spouse holds is bound by it, and agrees that on a divorce the interest goes to the owner-spouse or is sold under the agreement’s terms. I suggest the spouse have the chance to consult separate counsel before signing. More on the underlying rules is in my guides on spouses owning an LLC and California community property.

What changes in California

California adds community property, its own statutory buyouts and a property tax trigger. None of them appears in a national template.

Community property in the business

Shares or membership interests acquired during the marriage are usually community property (Fam. Code § 760). At death, half of the community belongs to the surviving spouse (Prob. Code § 100), and the federal gross estate includes the decedent’s property only to the extent of the decedent’s interest (IRC § 2033). So an agreement that forces the sale of “all shares held by” a deceased owner reaches the surviving spouse’s half as well, and the spousal consent described above brings that half under the agreement.

Community property also changes basis. When at least half of a community interest is included in the decedent’s gross estate, the surviving spouse’s half gets a new basis at death too (IRC § 1014(b)(6)). A buyout that closes soon after the first death often produces little capital gain for either half, while separately titled shares get the new basis only on the decedent’s own holdings.

A business one spouse owned before marriage can still have a community component. The California Supreme Court has explained that when a spouse devotes more than minimal effort to separate property, the community is entitled to a fair share of the profits that effort produces, a rule that traces to Pereira v. Pereira and Van Camp v. Van Camp (Beam v. Bank of America (1971) 6 Cal.3d 12). The buy-sell price doesn’t settle that division in a divorce. A spousal consent or a marital agreement settles it in advance.

California’s own buyout statutes

Without an agreement, California gives the other owners a buyout right only when someone sues to dissolve the company. In a corporation, the corporation or the holders of 50 percent or more of the voting power can avoid dissolution by buying the moving shareholders’ shares for cash at fair value, determined on a liquidation basis that accounts for a possible sale of the whole business as a going concern (Corp. Code § 2000(a)). In an LLC, the other members can avoid a judicial dissolution by buying the moving members’ interests at fair market value (Corp. Code § 17707.03(c)). In both, if the parties can’t agree, the court appoints three disinterested appraisers. A written agreement replaces that process with a price and a timetable the owners chose.

Property tax on company real estate

If the company owns California real estate, the buyout can reassess it. When a person obtains more than 50 percent of a corporation’s voting stock, or a majority interest in an LLC or partnership, through a purchase or transfer of interests, that’s a change in ownership of the entity’s real property (Rev. & Tax. Code § 64(c)(1)). A cross-purchase that takes a surviving owner past 50 percent fits that language. Property that went into the entity tax-free under the proportional-interest exclusion carries a second trigger, a cumulative transfer of more than 50 percent of the interests by the original co-owners (§ 64(d)). Have the reassessment question answered before either structure is signed.

Income and estate tax

California has no estate tax of its own, so Connelly is a federal problem. Gain on a buyout is a California problem. California’s top bracket is 12.3 percent, plus a 1 percent tax on taxable income over $1,000,000 (Rev. & Tax. Code § 17043), for a 13.3 percent top rate.

What is the IRC § 101(j) notice-and-consent rule?

It’s the federal rule that decides whether life insurance a business owns on an owner or employee pays out tax-free. Miss the paperwork, and the business can owe income tax on most of the death benefit.

For an employer-owned life insurance contract, the income tax exclusion is capped at the premiums the policyholder paid (IRC § 101(j)(1)). The full exclusion comes back only if the notice and consent requirements were met and an exception applies (IRC § 101(j)(2)). Before the policy is issued, the insured must be notified in writing that the policyholder intends to insure the employee’s life and of the maximum face amount, must consent in writing to being insured and to coverage continuing after employment ends, and must be told in writing that the policyholder will be a beneficiary (IRC § 101(j)(4)).

The exceptions are broad enough to cover most owners. They include an insured who was an employee at any time during the 12 months before death, an insured who was a director or highly compensated employee when the policy was issued, and proceeds used to buy an equity interest from the insured’s family or estate (IRC § 101(j)(2)). The word “before” is what trips people up. Consent signed after the policy is issued doesn’t satisfy the rule, and there’s no fix after the fact.

California follows the federal rule. Proceeds of an employer-owned life insurance contract received by a corporation are excluded from California gross income only in accordance with the federal rule for employer-owned contracts (Rev. & Tax. Code § 24305(c)). California’s personal income tax adopts the federal exclusions from gross income unless it says otherwise (Rev. & Tax. Code § 17131). California’s Insurance Code adds its own requirement: an employer that insures a director, officer, or employee must obtain the written consent of the person being insured (Ins. Code § 10110.1(c)).

A company that owns these policies also files an annual information return reporting the number of insured employees, the coverage in force, and whether it has a valid consent for each insured (IRC § 6039I(a)). The IRS form for that report is Form 8925. Premiums on a policy where the company is a beneficiary aren’t deductible (IRC § 264(a)(1)). My key person insurance guide walks through the same rules for a policy that protects the company rather than funding a buyout.

What tax questions should I take to my CPA?

I draft the agreement and explain the legal effect of each structure. The tax modeling belongs with your CPA, and these are the questions I’d bring.

• How does each structure affect the survivors’ basis and their gain on a later sale?
• For a corporation, will a redemption be treated as a sale or as a dividend, given the family attribution rules?
• For an LLC or partnership taxed as a partnership, how should payments to a departing member be characterized, and should the company make a basis adjustment election?
• Is my estate large enough that the Connelly valuation effect matters?
• If the company is an S corporation, does the agreement protect the election against a transfer to an ineligible shareholder?

How does a buy-sell agreement fit with my estate plan?

They should be drafted to match. If you hold your business interest in a living trust, the buy-sell agreement has to treat that trust as a permitted owner, name the successor trustee as the person who deals with the buyout, and pay the price to the trust.

Once a trust is the member, a change in trustee doesn’t dissociate it (Corp. Code § 17706.02(h)). That keeps the interest out of probate and lets the successor trustee sign the sale documents promptly. The broader planning, including who runs the company in the meantime, is in my business succession planning guide, the business continuity guide, and the page on what happens to an LLC when the owner dies. An owner who might become incapacitated rather than die also needs a business power of attorney that reaches the company interest.

What are the most common buy-sell mistakes?

1. A fixed price nobody updated. The agreement pays the family a number from years ago.
2. No funding. The agreement obligates a purchase the buyer can’t afford.
3. Policies that lapsed or no longer match the price after the company grew.
4. No spousal consent, which leaves the community interest arguably unbound.
5. Section 101(j) consents signed after the policy issued, or never signed.
6. A disability trigger with no definition.
7. A buy-sell clause that contradicts the operating agreement or the trust.
8. Redemption funding in a company large enough for Connelly to raise estate tax.

Guides in this series

• Partnership agreements in California
• Key person insurance for California small businesses
• How to add a member to an LLC in California
• How to remove a member from an LLC in California
• Business divorce: buying out a partner in California
• Assigning an LLC membership interest in California

Where my role starts and stops

I draft buy-sell agreements, spousal consents, and the operating agreement or shareholder agreement changes that go with them, and I coordinate with your CPA, your insurance agent, and an appraiser when the price calls for one. I don’t sell insurance or recommend a carrier, and I don’t set the value of your company. If the owners are already in a dispute over a buyout, or someone has filed suit, you need litigation counsel, and I can refer you.

Working with Ridley Law

I draft buy-sell agreements for owners whose companies are large enough that the funding structure changes the estate tax, and I review existing agreements against Connelly and § 2703. I work alongside your CPA and, where the matter calls for it, co-counsel. Work at this level is built for each family and quoted in writing before any drafting starts.

The first call is free and runs 30 minutes, by phone or Zoom. Book my 30-minute call or call 805-244-5291.

Frequently asked questions

How much does a buy-sell agreement cost in California?

Drafting time depends on the number of owners, the entity, and the funding. I bill buy-sell work at my hourly rate, and a two-owner LLC agreement with insurance funding and spousal consents is a far smaller job than a four-owner corporation with installment terms and a trusteed cross-purchase. The appraisal, if you use one, and the insurance premiums are separate costs.

Can a buy-sell agreement be added after the business is formed?

Yes, and most are. Adding one to an LLC usually means amending the operating agreement, which by default takes the consent of every member. Doing it while everyone is healthy and on good terms is the whole point.

Is a buy-sell agreement the same as an operating agreement?

No. The operating agreement governs how the LLC runs, and the buy-sell terms govern what happens to an owner’s interest when that owner leaves. The buy-sell terms are often a section of the operating agreement, but many operating agreements, especially templates, leave them out.

Who should own the life insurance in a buy-sell agreement?

It depends on the number of owners, their ages and health, and the company’s value. Two or three owners often fit a cross-purchase, while a larger group may fit a redemption or a separate entity that holds the policies. After Connelly, an owner with an estate near the federal exemption has a stronger reason to keep the proceeds outside the company.

What happens to a buy-sell agreement in a divorce?

If the non-owner spouse signed a spousal consent, the agreement’s divorce trigger and price usually control how the community interest is handled. Without a consent, the family court divides the community estate, and the other owners may find themselves dealing with a former spouse. A family law attorney handles the divorce itself.

How often should the price in a buy-sell agreement be updated?

At least once a year if you use an agreed value. Many agreements tie the update to the annual meeting or tax filing and fall back to an appraisal if the value is more than a set number of months old.

Does a single-owner business need a buy-sell agreement?

Not with co-owners, but it may need one with a key employee or a competitor who agrees to buy the business at the owner’s death. For a sole owner, the more common tool is a living trust holding the interest plus a written plan for who runs the business, covered in my succession planning guide.

Does Connelly apply to an LLC or a partnership?

The case involved a corporation. Its reasoning, that a buyer at death pays for the owner’s share of everything the entity holds including insurance cash, doesn’t depend on the entity type, so an LLC that owns policies on its members should plan for the same argument. A cross-purchase avoids the question. An insurance LLC moves it to a different entity, with open tax questions of its own.