Kumar demonstrates the importance of contemplating the relationship between control of the S corporation and potential shareholder disagreement.  As noted in 731 T.M., S Corporations: Operations, at VII, buy-sell agreements among shareholders or between a corporation and its shareholders meet a multitude of general business objectives and, due to the S corporation's unique eligibility requirements and distribution rules, a properly drafted buy-sell agreement is especially critical.  Minority shareholders have particular interest in the timing and amount of operating distributions because of their limited voice in the decision-making process.  Terminating shareholders will also want some assurance in the buy-sell agreement that minimal distributions will be made to cover taxes attributable to S corporation income, mainly because the taxes generally need to be paid with actual money.  Distribution calculations should consider federal and state taxes; however, any provision that requires distributions to cover taxes on a shareholder-by-shareholder basis should be avoided, as variations in rate structures may result in disproportionate distributions which could terminate S status.  

For a sample buy-sell agreement for an S corporation, see Worksheet 2 of 809 T.M., Estate Planning for Owners of Closely Held Business Interests.  

Ryan Prillaman