Entity Purchase Agreement

In an Entity Purchase Agreement, the company purchases life and or disability insurance on each of the owners. The company enters into an agreement with each owner to purchase that owner's interest in the company in the event of a triggering event. Benefits paid or the cash value of the insurance policy are used to make the purchase from the owner or her heirs. Once the entity purchase the exiting owners share, the remaining owner(s) interest in the business will increase proportionally.

Basic Advantages:*

• Ease of administration.
• Equalization of payments - The company pays premium expenses from company funds. Individual owners do not pay differing rates based on underwriting criteria.
• Business pays premiums - It may be psychologically easier for owners to make a business payment for the insurance than to pay for it from personal funds.
• Cash value is a business asset - As cash value builds on insurance policies, it may show as an asset on the balance sheet.

Common Concerns:*

• Policies and cash values are subject to business creditors and may be attached.
• Payments made by the company on behalf of each owner may be unequal. If there are major underwriting differences between the owners, the premium the company pays on each life may be significantly unequal.
• Depending on the timing of an owner's leaving the company, the amount received for their share may not be equal.
• The proceeds of the life insurance policy may increase the value of the the business for estate tax purposes.

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* - These are some common consideration but by no means an exhaustive list of considerations. There are a number of tax and legal issues that can only be addressed by a careful examination of your specific situation by a qualified professional.