Two people start a business together in Frederick, Baltimore, Rockville, or Annapolis. They agree on what the company does, who handles which side of the operation, and how they will split the early profits. They form a Maryland LLC, file articles of organization with the State Department of Assessments and Taxation (SDAT), and get to work. If they are careful, they sign an LLC operating agreement. If they are very careful, the operating agreement actually addresses what happens if one of them dies, gets divorced, becomes disabled, or simply wants out.

Most of the time, that last piece is missing. The owners assume the business will run forever, that nothing will go wrong, and that even if something does, the two of them will be able to work it out. Then one of them dies in their fifties. Or files for divorce. Or develops a disability and can no longer work. Or wants to retire while the other is just hitting their stride. And suddenly there is no clear answer to the most important question in the business: who owns what, and what does it cost to make that ownership change.

A buy-sell agreement is the answer to that question, written in advance. It is the contract that controls how ownership interests in your Maryland business can change hands, what triggers a buyout, who has the right or obligation to buy, what the interest is worth, and how the purchase price gets paid. For any business with more than one owner, it is arguably the single most important governance document the company will ever sign.

This guide explains how buy-sell agreements work for Maryland LLCs and corporations, what triggering events they should cover, how they should value a departing owner’s interest, how the U.S. Supreme Court’s recent decision in Connelly v. United States changed the planning landscape, and the most common mistakes Maryland business owners make with these agreements.

A buy-sell agreement is a contract among the owners of a closely held business (and often the entity itself) that governs the transfer of ownership interests under specified circumstances. It sets out:

• Triggering events: The specific events that activate the agreement (death, disability, divorce, retirement, voluntary withdrawal, involuntary removal, bankruptcy, and so on).
• Buyer and seller obligations: Whether the buyout is mandatory or optional, and who has the right or obligation to buy and to sell.
• Valuation: How the departing owner’s interest is priced.
• Payment terms: Whether the purchase price is paid in a lump sum or in installments, the interest rate on any deferred payments, and any security for the buyer’s payment obligation.
• Funding mechanism: Whether the buyout is funded with cash on hand, borrowed funds, life insurance, disability insurance, or some combination.
• Restrictions on transfer: Limits on each owner’s ability to transfer their interest outside the agreement, including rights of first refusal, drag-along rights, and tag-along rights.

In a Maryland LLC, buy-sell provisions are often built directly into the operating agreement rather than maintained as a separate document. That approach can work well, provided the buyout sections are drafted with the same care that a standalone agreement would receive. In a Maryland corporation, buy-sell terms typically appear in a separate shareholders’ agreement or stock restriction agreement, coordinated with the corporate bylaws and any stock certificate legends required under Md. Code, Corps. and Ass’ns § 2-211.

Title 4A of the Maryland Corporations and Associations Article (the Maryland LLC Act) provides a set of default rules that apply when an LLC’s governing documents are silent on what happens to a member’s interest. Those defaults are designed as a fallback. They are not designed to produce a clean ownership transition, and in practice they rarely do.

Cessation of membership (§ 4A-606)

Under Md. Code, Corps. and Ass’ns § 4A-606, unless the operating agreement provides otherwise, a person ceases to be a member of a Maryland LLC upon the occurrence of certain events, including:

• Withdrawal as authorized by § 4A-605
• Removal as a member in accordance with the operating agreement
• Assignment for the benefit of creditors, voluntary bankruptcy, or being adjudged bankrupt or insolvent
• For an individual member, death or adjudication as incompetent to manage the member’s person or property
• For an entity member, dissolution of the entity
• Assignment of all of the member’s economic interest under § 4A-603(d)

Interest of a member after cessation (§ 4A-606.1)

Section 4A-606.1 controls what happens to the economic interest of someone who ceases to be a member. If the LLC is not dissolved, the LLC may elect within a reasonable time to pay the former member (or that person’s successor in interest, such as an estate) the fair value of the interest in complete liquidation. If the LLC does not make that election, the former member or successor is deemed to be an assignee of the unredeemed economic interest under § 4A-603 and § 4A-604.

Assignee rights are economic only (§ 4A-603)

Under § 4A-603, an assignment of an economic interest does not entitle the assignee to become a member or exercise any rights of a member. Under § 4A-604, the assignee can become a member only in accordance with the operating agreement, by unanimous consent of the existing members, or under limited circumstances when no members remain. In practice, this means heirs, divorcing spouses, or creditors typically end up holding economic interests with no management or voting rights, unless the operating agreement says otherwise.

This is why a buy-sell agreement is so important. Every default rule above can be overridden by the operating agreement (or, where applicable, by a stand-alone buy-sell agreement). The owners can require a buyout, define the price, set the payment terms, and decide who steps in as a member. None of that happens by default in Maryland.

Death is the most common triggering event addressed by buy-sell agreements, and the consequences of getting it wrong are the most severe. Under Maryland’s default rules, the deceased owner’s economic interest passes to the estate or beneficiaries, who then hold an illiquid asset with no clear path to monetize it. The surviving owners may have no obligation to purchase the interest and no clear valuation method if they do.

A well-drafted death provision typically requires either the entity or the surviving owners to purchase the deceased owner’s interest, sets a valuation method (often life-insurance-funded at an agreed valuation), and specifies payment terms. The provision should also coordinate with the deceased owner’s estate plan to avoid unintended estate or income tax consequences.

What happens if a 45-year-old co-owner of a Maryland LLC has a stroke and can no longer work? The business needs the work that owner used to do, but the owner is still entitled to their share of the profits. Without a disability buy-sell provision, the active owners end up doing all the work while the disabled owner continues to share equally in the upside, and there is no mechanism for the disabled owner (or the disabled owner’s family) to liquidate their interest at a fair price.

A disability provision should define what counts as a triggering disability (typically a permanent disability that prevents the owner from performing essential duties for a specified period, often six to twelve months), describe the procedure for determining whether the disability has occurred (often a physician’s certification), and specify the buyout terms, which may differ from the death buyout terms.

Maryland is an equitable distribution state. Under Md. Code, Family Law § 8-205, a Maryland divorce court determines what property is marital property, values it, and may grant a monetary award as an adjustment of the equities and rights of the parties. The court’s statutory authority to transfer ownership is limited to specified categories of property, such as certain retirement interests, family use personal property, and jointly owned real property used as the parties’ principal residence. A closely held business interest acquired during the marriage with marital funds may be marital property for valuation and monetary-award purposes, but that does not necessarily mean the court can transfer actual ownership of the business interest to the non-owner spouse.

For closely held businesses, this presents a real problem. The non-owner spouse may receive a monetary award based in part on the value of the owner-spouse’s business interest, requiring the owner-spouse to fund a substantial payment without necessarily having liquid assets available. The divorce can also create practical pressure, settlement risk, creditor issues, or attempted transfers that disrupt the company. The remaining co-owners may not literally receive a new voting co-owner by court order in the ordinary case, but they can still face uncertainty, valuation disputes, and pressure involving the owner-spouse’s economic interest.

A divorce provision in a buy-sell agreement typically restricts any voluntary, involuntary, or attempted transfer of an ownership interest arising from divorce, requires notice to the company and the other owners, and may give the company or remaining owners a purchase option if an owner’s interest becomes subject to a divorce-related claim, lien, award, or attempted transfer. Properly drafted, the provision protects both the divorcing owner and the remaining owners from liquidity problems, valuation disputes, and unwanted transfer issues arising from divorce.

What if one owner wants to retire and cash out, but the other does not want to sell the business? Without a buy-sell agreement, there is no defined mechanism. The retiring owner cannot force a sale of the business, and the remaining owner has no obligation to buy out the retiring owner’s interest. The two end up either continuing as awkward partners (one active, one passive) or in litigation.

A retirement provision typically gives the retiring owner the right to require the entity or remaining owners to buy out their interest after a specified notice period, at an agreed valuation, on defined payment terms (often installments over several years to manage the entity’s cash flow).

Some owners need to be removed: persistent breach of the operating agreement, conviction of a crime that affects the business, sustained failure to perform agreed duties, or gross misconduct. A buy-sell agreement should specify the grounds for involuntary removal, the procedure for invoking it (typically a supermajority vote of the other owners), and the buyout terms that apply, which may be less favorable than the terms for a voluntary departure to discourage misconduct.

An owner’s personal bankruptcy or insolvency can expose the business to claims by the owner’s creditors. Maryland’s default rules under § 4A-606 already treat certain insolvency events as causing the member to cease to be a member, but the operating agreement can (and should) set out a clear procedure for buying out the insolvent owner’s interest before creditors can attach it. This is one of the most important protections a buy-sell agreement provides for the remaining owners.

Two equal owners. A fundamental disagreement about the direction of the business. Neither can outvote the other. Without a deadlock-breaking mechanism, the business can become paralyzed. A buy-sell agreement can address deadlock in several ways:

• Mediation or arbitration: Mandatory third-party intervention before either owner can force a buyout.
• Russian roulette (or “shotgun”) clause: One owner names a price; the other owner must either buy at that price or sell at that price.
• Texas shootout: Both owners submit sealed bids; the higher bidder buys out the lower bidder at the higher price.
• Forced sale of the business: If the owners cannot resolve a deadlock within a defined period, the business is sold to a third party and the proceeds divided.

Each mechanism has its own dynamics and risks. The right choice depends on the relative financial strength of the owners and the nature of the business. For a deeper look at how partner conflicts develop in Maryland businesses, see our guide on business partner disputes and legal options in Maryland.

If an owner receives an offer from a third party to buy their interest, the other owners typically want the right to step in and buy on the same terms before the interest is transferred to an outsider. A right of first refusal provision gives them that right. The buy-sell agreement should specify the notice procedure, the time period within which the other owners can exercise their right, and what happens if they decline (typically, the selling owner can complete the third-party sale on the terms originally offered, with the third party becoming subject to the buy-sell agreement going forward).

Buy-sell agreements come in three basic structures. The choice among them has significant tax, valuation, and administrative consequences.

For many Maryland closely held businesses with two or three owners, a cross-purchase agreement is the right answer post-Connelly, especially when life insurance is used to fund the buyout at death. For larger ownership groups, a hybrid agreement or an LLC-owned life insurance arrangement (which can preserve some of the administrative simplicity of redemption while keeping the proceeds out of the operating entity) may make sense. The right choice is fact-specific and should be evaluated with both a business attorney and a tax advisor.

Valuation is where buy-sell agreements most often fail. The owners agree on everything else, leave the valuation provision vague or boilerplate, and then discover at the worst possible moment (after a death, divorce, or falling-out) that they had different assumptions about what the business was worth. The four most common approaches:

1. Fixed agreed value (certificate of agreed value)

The owners agree on a value when the agreement is signed and update the value at regular intervals, typically annually. If the value has been updated within a specified period before the triggering event (often the prior twelve to twenty-four months), the most recent agreed value controls. The advantages are simplicity and predictability. The disadvantage is that owners frequently fail to update the value as the years pass, and a stale agreed value can be wildly disconnected from the business’s actual worth at the time of the triggering event.

2. Formula valuation

The agreement sets out a formula tied to objective metrics. Common formulas include book value, a multiple of trailing twelve-month revenue, a multiple of EBITDA, or some combination. Formulas are objective and easy to apply, but they often produce results that diverge from the business’s true value, especially if industry norms or business circumstances have changed since the formula was drafted.

3. Independent appraisal

An independent business appraiser determines fair market value at the time of the triggering event. This is typically the most accurate approach, but also the most expensive and time-consuming. To avoid disputes, the agreement should specify the standard of value (fair market value, fair value, or investment value), whether and how marketability and minority discounts apply, the qualifications required of the appraiser, and the procedure if the parties cannot agree on a single appraiser (often, each side picks an appraiser, and the two appraisers pick a third, with some averaging mechanism).

4. Hybrid: agreed value with appraisal fallback

The owners agree on a value annually, but if the value has not been updated within a specified period before the triggering event, the agreement defaults to an independent appraisal. This approach combines the simplicity of the agreed-value method with the accuracy of an appraisal, while creating an incentive to keep the agreed value current.

A buy-sell agreement that requires a $2 million payment to a deceased owner’s estate but does not specify how the buyer comes up with $2 million is not really a workable agreement. Funding is as important as valuation. The main options:

Cash from working capital

For smaller buyouts (or for businesses with significant cash reserves), the buyer may simply pay cash. This is the simplest option, but it requires the business to maintain enough liquidity to cover the largest expected buyout obligation, which can be capital-intensive.

Installment payments

The purchase price is paid over several years (commonly five to ten), often with interest at a specified rate. The agreement should specify the down payment, the installment schedule, the interest rate (which should be at least the applicable federal rate to avoid imputed interest issues under IRC § 7872), and any security for the buyer’s payment obligation (often a security interest in the purchased interest itself, plus personal guarantees from the buyer or buyers).

Life insurance (for death buyouts)

Life insurance is the most common funding mechanism for death buyouts. Each owner is insured for an amount approximating the value of their interest. On the insured owner’s death, the policy proceeds fund the buyout. The two basic structures are entity-owned policies (the company is the policy owner and beneficiary, used in redemption agreements) and individually owned policies (each owner owns policies on the other owners, used in cross-purchase agreements). The Connelly decision has made the choice between these two structures significantly more consequential.

Disability insurance (for disability buyouts)

For disability buyouts, business-overhead disability insurance or buy-out disability insurance can fund the purchase price. Coverage is generally available only up to specified caps, so for larger buyouts the agreement should include a backstop (such as installment payments) for the portion of the purchase price not covered by insurance.

Sinking funds or escrow

Some agreements require the business to set aside funds over time to cover anticipated buyout obligations. This approach is rare in smaller businesses but can be useful for larger or more capital-intensive companies where life insurance does not fully address the funding need.

On June 6, 2024, the U.S. Supreme Court issued a unanimous decision in Connelly v. United States, 602 U.S. 257 (2024), that significantly changed the planning landscape for life-insurance-funded buy-sell agreements.

The facts

Brothers Michael and Thomas Connelly owned all of the stock of Crown C Supply, a closely held building supply corporation. They entered into a buy-sell agreement that gave the surviving brother the option to purchase the deceased brother’s shares; if the survivor declined, the corporation was obligated to redeem the shares. To fund the buyout, the corporation purchased $3.5 million of life insurance on each brother. When Michael died, Thomas declined to purchase the shares, and Crown used $3 million of the life insurance proceeds to redeem Michael’s stock.

The estate reported the value of Michael’s shares as $3 million. The IRS audited and determined that the life insurance proceeds had to be included in the value of the corporation, increasing the company’s value to about $6.86 million and the value of Michael’s 77.18% interest to roughly $5.3 million. The estate argued that the company’s offsetting obligation to pay out the redemption price should reduce the company’s value, citing the Eleventh Circuit’s earlier decision in Estate of Blount v. Commissioner, 428 F.3d 1338 (11th Cir. 2005). The District Court and the Eighth Circuit ruled for the IRS, and the Supreme Court granted certiorari to resolve the circuit split.

The ruling

The Supreme Court unanimously affirmed, holding two things. First, life insurance proceeds received by a closely held corporation to fund a stock redemption are an asset of the corporation that must be included in the company’s date-of-death value for federal estate tax purposes. Second, the corporation’s contractual obligation to redeem the deceased shareholder’s stock at fair market value does not offset the increase in value caused by the insurance proceeds, because a hypothetical buyer of the corporation would not view that redemption obligation as a liability that reduces the company’s value.

Why it matters for Maryland businesses

Before Connelly, many Maryland businesses with redemption-style buy-sell agreements assumed that the corporate-owned life insurance funding the redemption did not increase the company’s estate-tax value, because the redemption obligation offset the insurance proceeds. Connelly rejected that view. After Connelly, a deceased owner’s estate can face a substantially higher federal estate tax bill than the buy-sell agreement anticipated, because the same insurance proceeds that fund the buyout also increase the value of the shares being bought.

Practical responses post-Connelly

• Convert to a cross-purchase agreement. Each owner buys insurance on the others, and the proceeds flow directly to the surviving owners (not the company) to fund the buyout. This keeps the insurance out of the company’s date-of-death balance sheet.
• Use an insurance LLC. A separate special-purpose LLC owns the life insurance policies, holding them outside the operating company. The proceeds fund the cross-purchase, but the administrative burden of multiple individual policies is reduced.
• Restructure using mandatory dividends or distributions. The agreement can be redrafted so that life insurance proceeds are distributed out of the company before the redemption occurs, though this requires careful tax structuring.
• Combine with an irrevocable life insurance trust (ILIT). For larger estates approaching the federal exemption, an ILIT can hold the policy outside both the company and the insured’s estate.

The right approach depends on the number of owners, their relative ages, the value of the business, the size of each owner’s estate, and broader tax-planning considerations. This is an area where careful coordination between business counsel, tax counsel, and an insurance professional is essential.

For family-owned Maryland businesses, the buy-sell agreement’s valuation provisions can be used to set the value of an ownership interest for federal estate and gift tax purposes, but only if the agreement satisfies the requirements of Internal Revenue Code § 2703. Otherwise, the IRS will value the interest as if the agreement did not exist.

The general rule (§ 2703(a))

Section 2703(a) provides that the value of property for transfer tax purposes is determined without regard to any option, agreement, or restriction that allows the holder to acquire or use the property at less than fair market value, or any restriction on the right to sell or use the property. As a default, then, a buy-sell agreement is ignored for federal estate and gift tax valuation purposes.

The safe harbor (§ 2703(b))

Section 2703(b) provides an exception. The agreement will be respected for valuation purposes if it satisfies all three of the following requirements:

1. Bona fide business arrangement. The agreement must be entered into for legitimate business reasons, not solely for tax planning.
2. Not a device. The agreement must not be a device to transfer property to family members for less than full and adequate consideration in money or money’s worth.
3. Arm’s-length terms. The terms of the agreement must be comparable to similar arrangements entered into by persons in arm’s-length transactions.

Treasury Regulation 25.2703-1(b)(3) also provides a deemed-compliance safe harbor: a buy-sell agreement automatically meets the § 2703(b) requirements if more than 50% of the value of the property subject to the agreement is owned by individuals who are not members of the transferor’s family, provided that the non-family owners are subject to the same restrictions as the transferor.

What this means for drafting

For a family-owned Maryland LLC or corporation that wants the buy-sell agreement’s value to bind the IRS, the practical requirements typically include:

• A documented business purpose for the restrictions and valuation formula.
• A valuation methodology that produces results comparable to what unrelated parties would accept, often supported by an independent appraisal or by a formula commonly used in the industry.
• Consistent enforcement of the agreement’s terms during the owners’ lifetimes, not just at death.
• Periodic updates of any agreed value to reflect actual changes in the business.
• Avoidance of fixed prices that have become disconnected from fair market value.

For closely held businesses with significant value approaching the federal estate tax exemption, the § 2703 analysis is best done in coordination with both a business attorney and a tax advisor. The cost of getting this right at drafting is far less than the cost of an unsuccessful estate-tax dispute later.

Buy-sell concepts apply equally to Maryland corporations, but the documents and statutory framework are different. For Maryland corporations, buy-sell terms typically appear in a shareholders’ agreement (sometimes called a stockholders’ agreement) and may also be reflected in the corporation’s bylaws and on the stock certificates themselves.

Stock certificate legends under § 2-211

Under Md. Code, Corps. and Ass’ns § 2-211, if a Maryland corporation imposes a restriction on the transferability of its stock, the stock certificate must either contain a full statement of the restriction or state that the corporation will furnish information about the restriction to the stockholder on request and without charge. This means buy-sell restrictions in a Maryland shareholders’ agreement should generally be referenced in a legend on the stock certificates, both for enforceability and to give notice to potential transferees.

Close corporations and stock restrictions (§ 4-503)

Maryland’s Close Corporation Act (Title 4 of the Corporations and Associations Article) gives close corporations a specific statutory framework for stock transfer restrictions. Under § 4-503, a transfer of stock in a close corporation is invalid unless either every stockholder consents in writing within the 90 days before the transfer, or the transfer is made under a provision of a unanimous stockholders’ agreement permitting transfer to specified categories of permitted transferees. This provides an additional layer of protection for closely held Maryland corporations that elect close corporation status.

Shareholders’ agreements

A Maryland shareholders’ agreement typically addresses the same buy-sell topics as an LLC operating agreement: triggering events, valuation, payment terms, funding, rights of first refusal, and restrictions on transfer. It can also address governance topics such as election of directors, voting agreements, supermajority approvals for major actions, and information rights.

For a comparison of LLC versus corporate structures for Maryland small businesses, including buy-sell considerations, see our analysis of LLC vs. corporation tax implications and our guide to S corporation elections for Maryland LLCs.

The most common mistake is the simplest one. Maryland co-owners assume they will sort out ownership issues if and when something happens. Then something happens. Maryland’s default rules under § 4A-606 and the related provisions of the LLC Act fill the gap, but they fill it badly. Heirs end up as economic interest holders without management rights. Divorcing spouses can become co-owners. The remaining owners have no obligation to buy out the departing owner’s interest, and no clear way to do so even if they want to. Litigation typically follows. For more on how these disputes develop, see our companion guide on business partner disputes in Maryland.

Online buy-sell templates are widely available and almost always inadequate. They typically use a single valuation method (often a fixed price or simple formula) that is not updated, do not address Maryland-specific statutory issues such as the § 4A-606 default rules, and rarely coordinate with the rest of the company’s governance documents or the owners’ estate plans. For a deeper look at the risks of generic templates and other contract drafting issues, see our guide on 8 common contract mistakes Maryland and Pennsylvania business owners make.

Many buy-sell agreements include a certificate of agreed value that is supposed to be updated annually. In practice, owners sign the initial value and then never revisit it. Five years later, the business has tripled in revenue, and the agreement’s stated value is wildly out of date. When a triggering event occurs, either the stated value badly under-compensates the departing owner (or their estate) or the parties have to renegotiate from scratch, often in the worst possible circumstances. A well-drafted agreement either requires annual updates with consequences for non-compliance (such as defaulting to an appraisal) or skips fixed values entirely in favor of formula or appraisal methods.

If your buy-sell agreement is a redemption-style agreement funded by company-owned life insurance, and you have not reviewed it since June 2024, it almost certainly needs to be revisited. The Connelly decision changed the estate tax treatment of the insurance proceeds in ways that can dramatically increase the federal estate tax payable by a deceased owner’s estate, without changing the cash that the family actually receives.

A buy-sell agreement does not exist in isolation. It must be consistent with the LLC’s operating agreement (or the corporation’s bylaws and shareholders’ agreement), the company’s articles of organization or incorporation, and each owner’s personal estate planning documents. Inconsistencies create ambiguity, and ambiguity in a buy-sell agreement almost always leads to litigation.

A buy-sell agreement that obligates the company or the surviving owners to pay $1 million for a deceased owner’s interest is only as good as the source of the $1 million. If the buyout obligation arises and there is no insurance, no sinking fund, no installment provision, and no available borrowing capacity, the agreement is unenforceable in practice. The funding question must be answered at drafting, not at the triggering event.

Many Maryland buy-sell agreements address death and disability but never mention divorce. Under Maryland’s equitable distribution rules in Family Law § 8-205, a divorcing owner’s interest in a closely held business can be valued as marital property and can affect the amount of a monetary award, even though the court’s statutory authority to transfer ownership is limited to specified categories of property. A divorce provision protects both the divorcing owner and the remaining owners from liquidity problems, attempted transfers, valuation disputes, and other outcomes neither of them wants.

A buy-sell agreement is a living document. It should be reviewed and updated when any of the following events occur:

• Admission of a new owner or investor. The new owner needs to be brought into the buy-sell framework, and the existing owners may want to renegotiate terms in light of the new ownership structure.
• Departure or buyout of an existing owner. The remaining ownership ratios change, and the buy-sell terms should reflect the new structure.
• Material change in the value of the business. Fixed values, formulas, and insurance coverage levels should be revisited.
• Significant change in tax law or relevant case law. The Connelly decision is a recent example. In 2025, federal tax legislation changed the estate and gift tax planning landscape by increasing the basic exclusion amount to $15 million for calendar year 2026, with inflation adjustments thereafter unless Congress changes the law again. Even with a higher federal exemption, buy-sell estate planning remains important for owners of valuable closely held businesses, especially where company-owned life insurance, state estate taxes, family succession, or IRC § 2703 valuation issues are involved.
• Change in the family status of an owner. Marriage, divorce, the birth of children, or the death of a spouse can all affect the structure of the buy-sell arrangement, especially in family-owned businesses.
• Change in the business itself. New lines of business, acquisitions, expansion into new states, or the acquisition of significant real estate may require corresponding changes to the buy-sell terms.
• Disputes or near-disputes among the owners. An actual or threatened conflict often reveals gaps or ambiguities in the buy-sell agreement that should be fixed before the next conflict arises.

As a general practice, buy-sell agreements should be reviewed at least every three to five years, and any agreed values should be updated annually. For businesses with general counsel relationships, the buy-sell review can be incorporated into the ongoing advisory relationship as part of the annual governance review.

A buy-sell agreement is a contract among the owners of a business (and often the entity itself) that controls what happens to an ownership interest when a triggering event occurs, such as the death, disability, divorce, retirement, voluntary departure, or insolvency of an owner. Maryland law does not require a separate buy-sell agreement. However, Maryland law does not provide an automatic or mandatory buyout if an owner dies, becomes disabled, or wants to leave. For Maryland LLCs, § 4A-606.1 gives the LLC an optional election, if the LLC does not dissolve, to pay the former member or successor in interest the fair value of the economic interest. If the LLC does not make that election, the successor is generally treated as an assignee of the unredeemed economic interest, with economic rights but no management rights unless admitted as a member. Without a buy-sell agreement (or buyout provisions inside the operating agreement or shareholders’ agreement), the remaining owners and the departing owner, estate, or successor can be left with no mandatory buyout, no agreed valuation method, and no clear path to liquidity or control.

An LLC operating agreement is the foundational governance document for a Maryland LLC. It addresses ownership, management, voting, profit allocation, and other internal affairs of the company. A buy-sell agreement focuses specifically on ownership transitions: when an owner can or must sell, who can or must buy, how the interest is valued, and how the purchase is funded. In many Maryland LLCs, buy-sell provisions are built directly into the operating agreement rather than being a separate document. In Maryland corporations, buy-sell terms typically appear in a separate shareholders’ agreement or stock restriction agreement, often coordinated with the corporate bylaws.

Under Md. Code, Corps. and Ass’ns § 4A-606, the death of an individual member causes that person to cease to be a member of the LLC, unless the operating agreement provides otherwise. Under § 4A-606.1, if the LLC does not dissolve, the LLC may elect within a reasonable time to pay the deceased member’s successor in interest the fair value of that interest in complete liquidation. If the LLC does not make that election, the successor is treated as an assignee of the unredeemed economic interest under §§ 4A-603 and 4A-604, meaning the heirs receive economic distributions but generally have no management or voting rights unless admitted as members. This default rarely matches what families and surviving owners expect or need, which is why a properly drafted buy-sell agreement is critical.

A redemption agreement (also called an entity-purchase agreement) obligates the business entity itself to buy back the departing owner’s interest. A cross-purchase agreement obligates the remaining owners individually to buy the departing owner’s interest. The two structures have very different tax and valuation consequences, especially when life insurance is used to fund the buyout. The U.S. Supreme Court’s 2024 decision in Connelly v. United States made cross-purchase structures more attractive in many cases because life insurance proceeds owned by the company can increase the company’s value for federal estate tax purposes.

In Connelly v. United States, 602 U.S. 257 (2024), the U.S. Supreme Court unanimously held that life insurance proceeds received by a closely held corporation to redeem a deceased shareholder’s stock are an asset of the corporation that must be included in the company’s date-of-death value for federal estate tax purposes, and the corporation’s obligation to redeem the stock does not offset that increase in value. The result is that life-insurance-funded redemption agreements can produce significantly higher federal estate taxes than owners expected. After Connelly, many closely held Maryland businesses are restructuring to cross-purchase agreements or other alternatives that keep the life insurance proceeds outside the company’s balance sheet.

Sometimes, but only if the agreement satisfies the requirements of Internal Revenue Code § 2703. Section 2703(a) provides that the value of property for estate and gift tax purposes is determined without regard to any option, agreement, or restriction that allows acquisition or use of the property at less than fair market value. Section 2703(b) provides an exception when three requirements are met: the arrangement is a bona fide business arrangement; it is not a device to transfer property to family members for less than full and adequate consideration; and its terms are comparable to similar arrangements entered into by parties in arm’s length transactions. For family-owned Maryland businesses, satisfying § 2703(b) typically requires careful drafting, professional valuation methodologies, and consistent enforcement of the agreement’s terms.

A comprehensive buy-sell agreement should address at least the following triggering events: death of an owner; permanent disability or incapacity; divorce, including the transfer of an interest to a spouse as a marital asset; voluntary withdrawal or retirement; involuntary departure such as termination of employment, expulsion, or breach of the agreement; personal bankruptcy or insolvency; deadlock between equal owners; and offers from third parties to purchase the interest. For each trigger, the agreement should specify whether the buyout is mandatory or optional, who has the right or obligation to buy, how the interest is valued, and how the purchase price is paid.

Maryland buy-sell agreements typically use one or a combination of the following valuation approaches: a fixed price agreed to by the owners and updated annually (the certificate-of-agreed-value approach); a formula based on book value, revenue, or a multiple of earnings; an independent appraisal performed by a qualified business appraiser at the time of the triggering event; or a hybrid approach (for example, an agreed value with an appraisal as a fallback if the value has not been updated within a defined period). The valuation method has significant tax consequences, especially for family-owned businesses, and should be drafted with both § 2703 of the Internal Revenue Code and the Supreme Court’s Connelly decision in mind.