EDMOND —
EDITOR’S NOTE: This is a weekly series of columns written by attorneys at Lester, Loving & Davies law firm in Edmond.
Q: A friend and I are starting a business. We want our families to be protected if something happens to one of us. What should we do?
A: When you enter into business with another person, you invest your time and money in an enterprise over which someone else has some control. Even when things go smoothly, business partnerships can create tensions that set everyone up for trouble when circumstances change. What happens if one partner becomes incapacitated and can no longer contribute? What happens if a partner files bankruptcy or dies? What if one partner just wants out? The remaining partner, the business itself and the departing partner all need protection.
If one partner dies, will her husband or children become your new partners or will you buy their stock at a previously agreed price? If one partner files bankruptcy, can her creditors become new partners or does the business have the right to buy her interest? If a partner becomes disabled, how long will the company continue to pay her salary? Will new stockholders, such as a departing partner’s heirs or creditors, be able to force the business to liquidate, or will the surviving partner maintain control? If one partner divorces, does her ex-husband become a third partner?
Every business should provide for these contingencies in advance with a written agreement that provides solid answers to these questions. Corporations should have stockholder agreements and bylaws that define what happens when things change. Limited liability companies should do the same in operating agreements. Partnerships should have partnership agreements. Informally organized businesses can use buy-sell agreements.
It is critical to provide a mechanism for funding partnership buy-outs so that the business can continue and the departing partner’s heirs can receive their share of the value of the business. Your business may be very valuable as a going enterprise, but do you have cash available to buy your partner’s interest? Often, businesses fund future buy-outs with life insurance on each partner. Policies can be designed to provide sufficient cash to buy your partner’s stock and ensure cash flow for the company as it recovers from the loss of a key component of its success.
The cost of planning ahead can pale in comparison to the costs of cleaning up problems when change eventually throws a curve ball. Your attorney can help you invest ahead in the documents necessary to avoid future business interruption.
MATT HOPKINS is an attorney for Lester, Loving & Davies P.C. More information is available at lldlaw.com. Send questions to questions@lldlaw.com.
Local News
ASK A LAWYER: How to protect families in business partnerships
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