What Is a Stock Redemption Agreement and Why Might I Need One in 2025? 

In public companies, shareholders can sell stock at any time on the market. Private companies are different. Their shares cannot be sold freely to the public, which makes ownership transfers more complicated. To manage this, many private companies use contracts called buy-sell agreements. One of the most common forms is the stock redemption agreement. 

In 2025, these agreements are more important than ever. A recent Supreme Court ruling has changed how taxes apply to agreements funded by life insurance, and businesses now follow new best practices to handle cash and avoid financial problems. If you own a private company, understanding these agreements can help protect your business from conflict and uncertainty. 

Public vs Private Company Ownership 

When a company goes public, it sells shares to the public through an initial public offering (IPO). This raises money and increases visibility, but it also means the founders give up some control as more shareholders come in. 

Most small businesses stay private. According to the U.S. Small Business Administration, there are around 32 million small businesses in the United States, and many of them are privately held. In these companies, owners are very careful about who can hold shares. 

Without rules for ownership transfers, problems can arise. For example, if a shareholder dies, their shares might go to a family member who has no business experience. That can cause confusion and even disagreements among the remaining owners. 

The Role of Buy-Sell Agreements 

A buy-sell agreement explains what happens when a shareholder leaves the company. This could be voluntary, such as retirement, or involuntary, such as death, disability, or misconduct. The agreement sets out how the company will buy back the shares or how other shareholders can purchase them. 

These agreements also explain how to value the shares, how payments will be made, and what rights each party has. By putting these rules in place, companies avoid disputes and keep operations running smoothly when ownership changes. 

What Is a Stock Redemption Agreement? 

A stock redemption agreement is a type of buy-sell agreement where the company itself buys back the departing shareholder’s stock. The company uses its own funds to make the purchase. The shares then become treasury stock, which the company can keep, cancel, or reissue later. 

Sometimes companies use insurance policies to fund these agreements. For example, the company might buy life or disability insurance on its shareholders. If a shareholder dies or becomes disabled, the insurance payout funds the buyback. This is called an insured stock redemption agreement. 

New Legal Update: The 2024 Connelly Decision 

In 2024, the U.S. Supreme Court made an important ruling in Connelly v. United States. The Court said that when a company receives life insurance money to buy back shares, that money increases the value of the company for estate tax purposes. It does not reduce the value. 

This means insured redemption agreements may now lead to higher estate taxes. Because of this, business owners should review their agreements with lawyers and tax experts to make sure they do not face unexpected tax bills. 

Funding and Liquidity Challenges 

A redemption agreement requires money, and not every company has enough cash on hand. Problems can arise if several shareholders leave at the same time or if the company does not have enough reserves. 

To avoid these risks, companies are now advised to: 

• Check insurance coverage regularly and adjust as ownership changes 

• Spread payments over time instead of paying everything at once 

• Keep backup plans, like savings or access to credit, to cover buyouts 

These steps reduce financial strain and ensure the company can keep operating smoothly. 

How to Draft a Strong Agreement in 2025 

Modern stock redemption agreements should include: 

• Clear rules for valuation so everyone knows how shares will be priced 

• Detailed triggering events that explain when the agreement applies, including cases of misconduct or bankruptcy 

• Contingency plans for unusual situations like multiple owners leaving at once 

• Compliance language to meet tax and legal requirements, including the 2024 Connelly ruling 

• Regular review by attorneys and tax advisors to ensure the agreement is enforceable and up to date 

How Business Owners Can Prepare in 2025 

• Create a stock redemption agreement as early as possible, ideally when starting the company 

• Review the agreement every year to reflect changes in value, ownership, or the law 

• Work with both legal and tax professionals to avoid mistakes 

• Consider using a hybrid model that mixes stock redemption and cross-purchase agreements for added flexibility 

Conclusion 

A stock redemption agreement is more than just a safeguard. It is a tool that protects your company, keeps ownership stable, and reduces the chance of legal or financial problems. With the new tax rules and funding challenges in 2025, reviewing your agreement is critical. Talk to a qualified attorney to make sure your business is ready for the future. 

Call Littleton Legal at (918) 608-1836 to draft or review your 2025 stock redemption agreement and protect your ownership, valuation, and exit plan. 

FAQs: Stock Redemption Agreement 

What happens if my company does not have a stock redemption agreement?
Without one, ownership could transfer to outsiders or family members who may not be prepared to run the business. This can cause disputes and disrupt operations. 

How often should we review our agreement?
At least once a year. You should also review it after major events like changes in ownership, business value, or new laws. 

Is life insurance still a good option for funding buyouts?
Yes, but you need to consider the tax impact after the 2024 Connelly decision. Insurance payouts now increase the company’s taxable value. 

What is the difference between a cross-purchase agreement and a stock redemption agreement?
In a cross-purchase agreement, the remaining shareholders buy the shares. In a redemption agreement, the company itself buys them back. 

Who should I talk to about setting one up?
An experienced business attorney and a tax professional can help draft and review the agreement.