A small business may be structured using any of several different types of legal entities, including a partnership. If you have entered into a partnership agreement, you retain a valuable legal interest in the business. That interest is an asset that should be protected within your estate plan. Ideally, the full value of your interest in the partnership should be available to help take care of your loved ones in the event something happens to you. One way to ensure that happens is to enter into a partnership buy sell agreement.
How Does a Partnership Work?
At its most basic, a partnership is a legal form of business operation between two or more individuals who share management and profits. Unlike forming a corporation, you are not required to execute legal documents to form a partnership; however, many partners do execute a partnership agreement. Simply being engaged in a business wherein the profits are shared is enough to form a partnership though, even if you do not sign an official agreement. There are also several different types of partnerships, the most common of which are the limited partnership and general partnership. In a general partnership, all of the partners manage the business and share the legal responsibility for company debts and liabilities. A limited partnership actually has both general and limited partners. The limited partners, however, are investors in the business only, meaning they do not make management decisions nor are they held responsible for debts and/or liabilities of the company.
The Need to Protect Your Interest
The interest you have in a partnership is an estate asset that has value. If something were to happen to you, wouldn’t you want your loved ones to benefit from that value just as they will from other estate assets you pass down to them? If you fail to address your partnership interest within your estate plan, however, your loved ones may not receive the full benefit of your interest in the business.
For example, imagine that you operate a business with your business partner Rob. You have not done anything to include your interest in the business in your estate plan. You are killed in a tragic accident tomorrow. What happens to your interest in the business? Will your family be able to benefit from your hard work and sacrifice? Without instructions and plans to the contrary, your interest will become part of your probate estate, meaning it will be tied up in probate court for months, even years. Your spouse may effectively take over your position as a partner in the business but she has no knowledge of how to run it and no interest in learning. Rob offers to buy your interest from your spouse for a fraction of what it is worth and she is forced to accept the offer because it is the only one on the table.
Scenarios such as this one occur all the time when partners fail to plan for things such as retirement, incapacity, and/or death of a partner.
What Is a Partnership Buy Sell Agreement?
A partnership buy sell agreement is a legal agreement that sets forth the terms of a future sale of your interest in the partnership. The agreement is made with a designated purchaser, usually an existing partner but it can be anyone. The agreement locks in the sale of your interest in the business in the event that certain enumerated events occur, such as your death, incapacity, or even retirement. You can agree on the sales price when the contract is executed or you can simply include a method of determining the fair market value when the time comes. Upon the occurrence of a covered event, the sale of your interest in the business occurs automatically. The obvious benefit to you is in knowing that your interest will be sold at a fair market value and that your loved ones will benefit from that sale.
For more information, please join us for an upcoming FREE seminar. If you have additional questions about a partnership buy sell agreement, contact the experienced North Dakota estate planning attorneys at German Law by calling 701-738-0060 to schedule an appointment.