Which method describes a cross-purchase arrangement in a partnership?

Which method describes a cross-purchase arrangement in a partnership?

• A. Buy-sell agreement
• B. Entity purchase
• C. Cross purchase
• D. Stock purchase

Answer: (C)

Cross-purchase arrangements are a form of buy-sell agreement used in partnerships. In this setup, each partner agrees to purchase the interest of a partner who leaves the business due to retirement, disability, or death. This keeps ownership with the remaining partners and provides liquidity to the departing partner’s estate or to the partner who exits. To fund these purchases, life insurance on each partner is commonly used, with the death benefit providing the funds to buy the departing partner’s share at the agreed price. In contrast, an entity purchase arrangement has the partnership itself buy the departing partner’s interest, which changes ownership differently and doesn’t involve the other partners as buyers. A stock purchase is a term more appropriate to corporations, where shares are bought rather than partnership interests. Thus, cross-purchase describes this arrangement.

Cross-purchase arrangements are a form of buy-sell agreement used in partnerships. In this setup, each partner agrees to purchase the interest of a partner who leaves the business due to retirement, disability, or death. This keeps ownership with the remaining partners and provides liquidity to the departing partner’s estate or to the partner who exits. To fund these purchases, life insurance on each partner is commonly used, with the death benefit providing the funds to buy the departing partner’s share at the agreed price. In contrast, an entity purchase arrangement has the partnership itself buy the departing partner’s interest, which changes ownership differently and doesn’t involve the other partners as buyers. A stock purchase is a term more appropriate to corporations, where shares are bought rather than partnership interests. Thus, cross-purchase describes this arrangement.