A cross-purchase agreement is a type of buy-sell agreement in which each company shareholder agrees ahead of time to purchase shares from a shareholder who withdraws from the company. Partners also agree to sell their shares to remaining shareholders if they withdraw. The company itself is not part of the transaction.
Shareholders must have the funds available to purchase each others' business interest when the time comes. Life insurance policies are commonly used as a funding plan. In a cross-purchase agreement, shareholders buy a life insurance policy on the lives of the other shareholders. Shareholders pay the premiums and are named as beneficiaries of the policy.
Disadvantages of a cross-purchase agreement are that they can involve purchasing many expensive life insurance policies, depending on how many people hold an interest in your company, and they can be difficult to administer. Advantages include that the cash value and proceeds from the life insurance policies are inaccessible to creditors and are not subject to corporate taxation.
It's important to explore all your options and get legal advice before deciding whether a cross-purchase agreement is the right type of buy-sell agreement for your business.
First Commonwealth Bank and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.