An agreement among co-owners of a C-corporation goes by a variety of names, such as buy-sell agreement, buyout agreement or shareholders' agreement. However, when you design your own agreement, it may be useful to think of it as a "premarital agreement" between you and the other co-owners. Like a premarital agreement, the C-corporation agreement is created for the purpose of determining how to handle a "break-up" that can happen due to the death, bankruptcy or divorce of one of the co-owners. Even if a co-owner just wants to be bought out, the agreement will specify how it should be handled.
Decide what circumstances trigger a buy-out of co-owner's share of the business. Death, divorce and bankruptcy are circumstances that are typically included in the agreement, but you should also specifically state whether a co-owner has a right to force a buy-out if that person simply no longer wants to be part of the business, whether through retirement or resignation.
Decide who can buy the co-owner's share of the business. You may want to limit the sale to the other co-owners and the corporation itself.
Decide how the price for the buy-out will be determined. There are a variety of formulas used to value a business, and it's best to decide on which one to use that is appropriate for your industry.
Decide what to do in the event that the co-owners are unable to agree on a buy-out price. You may want to consider hiring a neutral appraiser who is qualified to value businesses in your industry to decide the price.
Consider whether to require mediation and arbitration as a means to resolve a dispute regarding the buy-out. These alternative dispute resolution services can be less costly and time-consuming than litigating in court.
Decide how the transaction costs associated with the buy-out should be allocated between the corporation and co-owners involved in the sale. Even when the co-owners are in agreement, the buy-out will usually require the services of the business's accountant and lawyer to complete the transaction.
Consider requiring life insurance for each of the owners as a means of funding the buy-out in the event of a co-owner's death.
- C-corporation agreements are not legally required in order to incorporate your business; however, without such an agreement, resolving a dispute over a buy-out could be costly.
- Formulas for valuing stock, particularly of a small private corporation, can vary greatly. Seek the advice of a qualified accountant regarding what formula may be best for your business.
- There are several standard provisions that may be required of a C-corporation agreement in your state of incorporation. Legal self-help guides sold in your state should provide you with this information.