April 13, 2022

If you have any questions about a share repurchase agreement for your business succession planning, please contact Fredrick P. Niemann, Esq., a competent and practical New Jersey attorney. He has over 40 years of experience and looks forward to supporting you and your business. Mr. Niemann can be reached free of charge at (855) 376-5291 or by email at fniemann@hnlawfirm.com. Call him today. If a client requests the preparation of a purchase or sale agreement for the interests of a limited liability company (LLC), the attorney should always gather additional information before preparing such an agreement to obtain a complete picture of the exchange. Share repurchase agreements are formally written and can be prepared years before shareholders leave. They are designed in such a way as to avoid problems related to the remuneration of the outgoing member and the remaining shareholders who will acquire the shares of the outgoing members.

Share repurchase agreements are best implemented in companies where current shareholders each have an equal number of shares in the company. They assure all shareholders that no minority shareholder will acquire the shares of the outgoing member and thus take over the majority of the company from a shareholder. These agreements also give shareholders the assurance that no third party will buy the shares and become a member of their company. In Foxman v. Commissioner, 41 T.C. 535, 550-51 (1964), aff`d, 352 F.2d 466 (3d Cir. 1965), an outgoing partner entered into an agreement to sell his entire interest in the company to the other two partners. In the individual`s tax return after this transaction, the departing partner treated the transaction as a sale and reported a capital gain. However, the two remaining shareholders treated the transaction as a buyback, which resulted in a significant reduction in their distributive shares in the company`s income and thus a more favorable tax outcome for both. Business partnerships don`t last forever. When setting up a limited liability company, it is common to make an agreement about what happens when an owner wants to go out.

The buyback agreement may require the outgoing owner to sell to his partners. With an interest repayment agreement, the LLC itself buys back the owner`s share. Carefully crafted repurchase agreements can protect remaining members from being burdened by unverified or unknown successors and minimize the risk of disputes and stress between co-owners caused by the uncertainty of an outgoing owner. However, the feasibility of such agreements should be subject to regular review. For example, feasibility is important to ensure that the company has sufficient funds to buy back the shares – and also for practical reasons, to confirm that the conditions still meet the needs and objectives of the owners and the company. Another common type of buy-sell agreement is the “share buyback” agreement. It is an agreement between the shareholders of a company that states that if a shareholder leaves the company, whether due to retirement, disability, death or any other reason, the shares of the outgoing members will be purchased by the company. When the company buys out the outgoing shareholder, it effectively increases the proportional stakes of each shareholder in the company and ensures that no shareholder acquires more power or majority stake in the company. In summary, deliberate structuring and proper documentation will serve all parties and their lawyers well. A buyer`s or seller`s remorse caused by “after the fact” tax planning and non-compliance with the LLC operating agreement can lead to business interruption and lengthy costly litigation. To avoid unintended negative consequences, the attorney must ensure that the client`s transaction complies with Llc`s operating agreement and take care to create documentation that is consistent with the intentions and informed decision of the parties. Share repurchase agreements must be prepared by an experienced business lawyer.

What for? Because there are many guidelines that you have to follow to be recognized. If spelled correctly, they can be incredibly beneficial for any business. They assure shareholders that they do not have to find a buyer for their shares and will be compensated if they leave the company. .

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