A buy-sell agreement decides, in advance and while everyone is on good terms, what happens to an owner’s share of a closely held business when that owner dies, becomes disabled, divorces, retires or leaves. Without one, North Carolina law usually leaves the departing owner or the owner’s family holding an interest they cannot sell, and leaves the remaining owners sharing the company with people they never chose. A North Carolina buy-sell agreement attorney designs the triggers, the price and the funding so that the transition happens on terms the owners agreed to rather than terms set in court.
Holmes Law is the practice of Michael Holmes, an attorney licensed in North Carolina and five other states. Holmes Law prepares and reviews buy-sell provisions remotely for owners of North Carolina LLCs and corporations, including family businesses, professional practices and real estate holding companies, and coordinates them with the owners’ personal estate plans. This page is part of the North Carolina business law practice area and explains how these agreements work under North Carolina and federal law.
What a Buy-Sell Agreement Does
A buy-sell agreement can be a stand-alone contract or a set of provisions inside an LLC operating agreement or corporate shareholder agreement. Either way, it answers four questions:
- Triggers: what events give rise to a purchase right or obligation?
- Buyer: who buys, the company or the other owners?
- Price: how is the interest valued?
- Payment: where does the money come from, and on what terms is it paid?
North Carolina statutes expressly authorize these arrangements. G.S. 55-6-27 allows a corporation to restrict share transfers and to obligate the shareholder, the corporation or other persons to buy restricted shares, provided the restriction is noted conspicuously on the share certificate or the required information statement if it is to bind those without actual knowledge. For LLCs, the broad freedom of contract under G.S. 57D-2-30 allows the operating agreement to create mandatory or optional purchase rights.
Why the North Carolina Defaults Are Not Enough
Consider what happens to a North Carolina LLC member who dies without a buy-sell provision. Under G.S. 57D-3-02, the member ceases to be a member, and the estate generally holds an economic interest: the right to receive distributions, without a vote. Under G.S. 57D-5-05, the estate cannot force the company to buy the interest unless the operating agreement requires it. The surviving owners, for their part, have no right to buy the estate out. Everyone is stuck. The family receives whatever distributions the remaining owners choose to make, and the remaining owners have a permanent passive partner.
Corporations present a similar problem in a different form. A deceased shareholder’s stock passes through the estate to heirs, who acquire full voting rights. The surviving owners may find themselves outvoted by a spouse or children who have never worked in the business.
A buy-sell agreement replaces both outcomes with a planned purchase.
Triggering Events
Death
Death is the most common trigger and usually carries a mandatory purchase, because both the family and the surviving owners want certainty. The agreement should coordinate with the deceased owner’s will or trust, so that the personal representative or trustee is bound to sell and the proceeds pass as the owner intended. Interests held in a North Carolina revocable trust should be addressed expressly so that the trust is treated as the owner.
Disability
Disability triggers require a definition. The agreement should state how long an owner must be unable to perform his or her role before the trigger applies, who decides, whether a disability insurance definition controls, and what happens if the owner recovers. Vague disability provisions are among the most frequently litigated terms in buy-sell agreements.
Divorce
North Carolina is an equitable distribution state, not a community property state. Under G.S. 50-20, marital property, generally property acquired by either spouse during the marriage and before separation, is divided between the spouses, and a business interest acquired during the marriage can be marital property even if only one spouse is an owner. Increases in value of separate property may also need to be analyzed depending on whether they resulted from marital efforts, and post-separation changes in value can be “divisible property.” A buy-sell agreement typically gives the company or the other owners the right to buy any interest a court awards to the non-owner spouse, and may require each owner’s spouse to sign an acknowledgment of the transfer restrictions. The agreement cannot bind the family court’s valuation of the business, but it can keep the interest itself inside the ownership group.
Departure, retirement and termination
Owners who work in the business should address voluntary departure, retirement at an agreed age, and termination of employment for cause. Many agreements use different prices for different departures, paying full value on retirement and a discounted value on a departure in breach of the agreement. These provisions should be drafted carefully, because an unreasonable penalty invites a challenge.
Other triggers
Bankruptcy, a creditor’s charging order under G.S. 57D-5-03, loss of a professional license, a proposed transfer to an outsider, and a persistent deadlock between owners can all be triggers. A professional entity must also make sure that an interest never passes to someone who is not licensed to own it.
Valuation Methods
The price term is where most buy-sell agreements succeed or fail. The common methods are these:
- Agreed value. The owners set a price and update it periodically, often annually. Simple, but the price becomes stale when owners forget to update it. A fallback to appraisal if the agreed value is too old is essential.
- Formula. A multiple of earnings, revenue or book value. Predictable, but formulas can drift away from real value as the business changes.
- Appraisal. One or more independent appraisers value the interest at the trigger date. More accurate, but slower and more expensive, and the agreement must specify the standard of value, the valuation date and whether discounts for lack of control and lack of marketability apply.
The standard of value matters more than owners expect. “Fair market value” of a minority interest is usually discounted; a pro rata share of enterprise value is not. North Carolina courts deciding judicial dissolution buyouts under G.S. 57D-6-03 and G.S. 55-14-31 use “fair value,” another distinct standard. The agreement should state which standard applies to each trigger.
Funding the Purchase
Life and disability insurance
Insurance is the most common way to fund a death buyout. There are two basic structures:
- Cross-purchase. Each owner owns a policy on the other owners and buys the deceased owner’s interest directly with the proceeds. The buyers receive a cost basis equal to the purchase price. With many owners the number of policies multiplies, which is sometimes solved with a trusteed arrangement or a separate partnership that holds the policies.
- Entity redemption. The company owns one policy on each owner and redeems the deceased owner’s interest. Simpler to administer, but the surviving owners do not receive a basis increase in a corporation, and the policy proceeds are company assets.
Connelly v. United States
In Connelly v. United States, 602 U.S. 257 (2024), the Supreme Court held that a corporation’s obligation to redeem a deceased shareholder’s shares does not reduce the corporation’s value for federal estate tax purposes, and that life insurance proceeds the corporation receives to fund the redemption are counted as a corporate asset. As a result, an entity-redemption agreement funded with company-owned insurance can increase the value of the deceased owner’s shares for estate tax purposes. Owners whose estates may be large enough to face federal estate tax should revisit entity-redemption agreements after Connelly and consider cross-purchase or other structures.
Installment payments and other funding
Where insurance is unavailable or incomplete, agreements commonly allow the buyer to pay over time with a promissory note, secured by the purchased interest or company assets, with limits tied to cash flow. The agreement should also consider the North Carolina distribution limits in G.S. 57D-4-05 and the corresponding corporate rules, because a company cannot make a redemption payment that would leave it unable to pay its debts. A sinking fund, a line of credit or a combination of insurance and installment payments can provide flexibility.
Estate Tax and Estate Planning Interplay
North Carolina repealed its state estate tax for deaths on or after January 1, 2013, and it has no inheritance tax. The federal estate tax still applies to larger estates, and a buy-sell agreement can affect how a business interest is valued for federal purposes. Under Internal Revenue Code Section 2703 and the accompanying regulations, a price set in an agreement is respected for estate tax purposes only if the agreement is a bona fide business arrangement, is not a device to transfer property to family members for less than full consideration, and has terms comparable to arm’s-length arrangements. Agreements among family members face the most scrutiny.
Coordinating the buy-sell agreement with the owner’s estate plan also matters for liquidity. The estate may need the purchase price to pay debts or equalize inheritances among children who are not in the business. The North Carolina estate planning practice area discusses those issues, and the NC irrevocable trusts page covers insurance trusts that can hold policies outside the taxable estate.
Tax Treatment of the Purchase
How the buyout is structured changes the income tax results. In a corporation, a redemption may be treated as a sale of stock or as a dividend depending on the attribution rules, which can be a trap in family companies. In an LLC taxed as a partnership, payments to a departing member are governed by the partnership tax rules, and the parties may be able to choose between treatment as a purchase of the interest or as payments from the partnership. A cross-purchase gives the buying owners a new basis; a redemption usually does not. Your CPA should review the structure before the agreement is signed, not after the trigger occurs.
Restrictive Covenants and the Buy-Sell Agreement
A departing owner who is paid for his or her interest can often be bound by a covenant not to compete, a non-solicitation covenant and confidentiality terms. North Carolina courts have traditionally reviewed covenants given in connection with the sale of a business more leniently than employment covenants, because the buyer is paying for goodwill. The covenant still must be in writing and signed under G.S. 75-4 and reasonable as to time and territory, and North Carolina follows the strict blue-pencil rule: a court may strike an unreasonable divisible provision but will not rewrite it. The NC business contracts page covers restrictive covenants in more detail.
When a North Carolina Buy-Sell Agreement Attorney Should Review Yours
Many North Carolina businesses have a buy-sell agreement that no one has read since it was signed. Common problems include:
- an agreed value that has not been updated in years;
- insurance that no longer matches the price or has lapsed;
- an entity-redemption structure that should be reconsidered after Connelly;
- no provision for divorce, disability or a trust-owned interest;
- an agreement drafted under the prior LLC Act or for an entity that has since converted;
- transfer restrictions never noted on corporate share certificates.
A review every few years, and after any change in ownership, is inexpensive insurance against a dispute at the worst possible time. Holmes Law’s review typically compares the agreement against the current ownership records and operating or shareholder agreement, confirms that the triggers and valuation method still reflect what the owners want, checks whether the insurance in force matches the purchase obligation, and flags any provisions that conflict with each owner’s will or trust. The result is a short written summary of the gaps and a proposed amendment, so the owners can decide together what to change while everyone is still available to agree.
Frequently Asked Questions
What is the difference between a cross-purchase and a redemption agreement?
In a cross-purchase, the remaining owners buy the departing owner’s interest directly. In a redemption, the company buys it. The choice affects the number of insurance policies, the buyers’ tax basis and, after Connelly v. United States, the estate tax value of the deceased owner’s interest.
Does North Carolina community property law affect my buy-sell agreement?
North Carolina is not a community property state. It divides property on divorce under equitable distribution, G.S. 50-20, and a business interest acquired during marriage can be marital property. A buy-sell agreement should give the company or other owners the right to buy any interest awarded to a spouse and should ask spouses to acknowledge its terms.
Is the buy-sell price binding for estate tax purposes?
Not automatically. Under Internal Revenue Code Section 2703, the price will be respected only if the agreement meets the statutory tests, including that it is a bona fide business arrangement with arm’s-length terms. Family agreements receive particular scrutiny.
Can my business partner’s heirs refuse to sell?
If the agreement contains a mandatory purchase obligation triggered by death and binds the owner’s estate and successors, the estate generally must sell on the agreed terms. That is why the agreement should be coordinated with each owner’s will or trust.
How often should we update the valuation?
If the agreement uses an agreed value, update it at least annually and after any major event. Include a fallback to appraisal if the value has not been updated within a set period.
Does North Carolina have an estate tax?
No. North Carolina repealed its estate tax for deaths on or after January 1, 2013. Federal estate tax may still apply to larger estates.
Speak With a North Carolina Buy-Sell Agreement Attorney
A buy-sell agreement protects your family, your partners and the business itself, but only if it is current and fits the way your company is owned today. Holmes Law can draft a new agreement or review an existing one alongside your operating or shareholder agreement. Contact Holmes Law to schedule a remote consultation with Michael Holmes.