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What makes a buy-sell important to a sole proprietorship?

On Behalf of | Mar 4, 2024 | Business & Commercial Law

Buy-sell agreements help many medium and large companies transition from one owner to another, or to replace partners and members who retire or die. However, even a small business owned by a sole proprietor can use a buy-sell to pass to a new owner.

Sole proprietorships have special reasons to need a buy-sell contract if they are to survive beyond the initial owner.

Keeping the business out of an estate

A sole proprietorship is not its own legal entity. Since it is not distinguishable from the owner, the business assets are the personal property of the owner. When the owner dies, the assets become part of the estate of the owner.

In the event the owner had some outstanding debts, the estate executor can liquidate assets from the estate to pay creditors. Even if the debts had nothing to do with the business, the executor may still end up selling the assets of the company to pay off the outstanding amounts.

Passing the business to a willing successor

A buy-sell contract provides for a designated person to become the new owner. Without the buy-sell, the business could go to a family member, such as the spouse or eldest child of the original owner. However, it is possible that the heir has no desire to take over the business and will shut it down.

Even if the relative is willing to continue the company, the original owner might not have trained the new owner to run the business, so the heir lacks the education or the skill to keep up the enterprise. Additionally, the heir may have physical limitations or just does not have the time to operate the business.

Given that a sole proprietorship can easily meet its end if its owner dies, creating a buy-sell agreement can make all the difference in continuing the enterprise going forward.