How to Design a C-Corporation Agreement

By Joe Stone

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.

About the Author

Joe Stone is a freelance writer in California who has been writing professionally since 2005. His articles have been published on LIVESTRONG.COM, SFgate.com and Chron.com. He also has experience in background investigations and spent almost two decades in legal practice. Stone received his law degree from Southwestern University School of Law and a Bachelor of Arts in philosophy from California State University, Los Angeles.

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