2 Tax Planning for S Corporations § 14.02

Summary

• [1] Events Causing Purchase and Sale

  A Buy-Sell agreement must identify the events that cause a purchase and sale of shares. A mandatory purchase agreement obligates both parties to buy and sell. An optional agreement or right of first refusal would give one party the option, but not the obligation, to purchase.

  • [a] Transfers During Life

    A Buy-Sell Agreement may restrict a shareholder’s ability to transfer stock during his lifetime. This restriction may be an absolute prohibition or, more typically, a right of first refusal. Under the agreement, any shareholder who receives an offer from an outsider to purchase his stock and desires to sell must notify the corporation and the other shareholders of the offer. The other shareholders and/or the corporation then have the option to purchase the stock on the same terms and at the same price as the bona fide third-party offer. Alternatively, the agreement itself could specify both the option price and payment terms. Only if the option is not ...