Avoid an Unknown Business Partner

When we enter a business with a partner, we enter into a meaningful relationship. Some even compare it to a marriage, while others recognize that the time spent with a business partner might far eclipse the time with a spouse. We have business partners with whom we have confidence, a relationship of trust, and a constructive partnership. In such circumstances, it is concerning that we might partners with anyone else if our partner dies, divorces, or sells the business interest. There are easy ways to address these issues.
1. Preventing a sale of ownership interests.
This is the easiest to address. If you want to prevent a unilateral sale of business interests, simply rewrite your bylaws, operating agreement, or partnership agreement. It is entirely permissible to have an agreement that precludes a partner from selling their business interests without unanimous consent. If you do not have operating bylaws for your corporation, an operating agreement for your LLC, or a partnership agreement, and you are in a partnership, you should have one prepared immediately by counsel of your choosing.
2. A divorcing partner.
If your partner finds him or herself in the unfortunate situation of having a divorce, the result could be disastrous. Spouses can claim a partial interest in the business, and assert that they are now your business partner. Preventative measures must be taken in advance. In order to prevent this outcome, again you would turn to the bylaws, operating agreement, or partnership agreement. The agreements can be written or amended to provide that in the event of a divorce, the partner involved in the divorce must surrender all other marital property to the spouse before giving any interest in the business. It can mandate that the existing partner must take all measures in the course of the divorce proceedings to prevent the ex spouse from taking any business ownership. In that way, the greatest protection possible would exist against a spousal interest. Another alternative might be to get an existing spouse to relinquish any business interest as a gift to the partner spouse. In fact, the partner spouse can enter into a prenuptial or postnuptial agreement that releases any interest in business ownership. You should consult with counsel in your state, to determine the scope of any divorce rights and opportunities for protection.
3. Death of a partner.
When a partner dies, there are often complicated estate issues. They may leave their partnership interest to their spouse, family, or others. The surviving partner is usually not content leaving the partnership in the hands of a probate court.
There is a feasible solution. The most common approach is a buy-sell agreement. The partnership can identify a fair and appropriate value for the partnership, preferably on an annual basis. The partnership might then buy life insurance on each of the partners, sufficient to fund a buy out for that partnership interest. The agreement would reflect that the life insurance proceeds would be used to satisfy a buy-out of the deceased party’s interest from their estate. If the partners have spouses, it is best to have the spouses sign an acknowledgement that they will accept the life insurance proceeds as satisfaction of all business interests. Upon the death of a partner, the surviving partner(s) own s the entirety of the partnership.
Again, such an approach may require amendment of existing bylaws, operating agreement, or partnership agreement. It is recommended that you consult with counsel to determine if this approach if feasible under your circumstances.

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