Which of the following best describes an entity plan in a buy-sell agreement?

An entity plan in a buy-sell agreement involves the business entity itself purchasing life insurance on behalf of each partner involved in the business. This setup ensures that the business has the necessary funds to buy out a partner's share in the event that they pass away or leave the business. By having the entity own the policy, it simplifies the insurance process and ensures that the payout goes directly to the business, which can then use those funds to facilitate the transfer of ownership according to the pre-agreed terms.

This structure provides a clear financial plan for ensuring continuity in the business and alleviates potential burdens on individual partners to secure coverage on one another, as the business will manage the policies. The approach creates a unified strategy that maintains control within the partnership and minimizes potential conflicts regarding shareholder transitions.

In contrast, the other options do not accurately describe the essence of an entity plan. For example, if each partner buys insurance on each other, that would align more with a cross-purchase agreement rather than an entity plan. Allowing external investors to buy shares does not pertain to the buy-sell agreement’s primary intended function of regulating ownership among existing partners. Lastly, no insurance used in the plan would negate the very purpose of a buy-sell agreement,