Now for that promised partnership stuff:
There are friendships and relationships. But the one ship that rarely makes port is a partnership. (Dave Ramsey – Ramsey Solutions, LLC) I myself have never been in a partnership. But I do know many who have, and my “experience” while not personal, is based on the horror stories from others who have experienced them.
Are you married? Is your business partner married? What happens if you or that partner dies? What do you think happens to that partner’s share in the partnership? Do they have a will? Weather they do or not don’t matter. But if not addressed, your “new” partner or partners can and usually will ruin you. Does your deceased partner’s spouse dislike you personally? You think they’re going to “work with you” upon inheriting your deceased partner’s share of the business? What if the deceased partner has three children and their estate is split equally among the kids? Now you have a partnership with four partners. Do you really expect everyone to agree on everything concerning the partnership now? Is one of them under age? Now you have a real nightmare from which you will never awaken. What can be worse than this you ask? Divorce.
What if you partner gets divorced? In a marriage, assets and wealth acquired by one married person, are legally considered assets and wealth of the marriage. So chances are high that the soon to be ex will get half of your partner’s share in the business. Do you think they’re going to cooperate in business decisions that require it? Most likely down the road you’ll get a knock at your front door and upon answering are greeted with, “Hi! My name is Joe Blow and I’m your court appointed bankruptcy attorney. I’m here to list all assets you own and place a dollar value on them per this court order I’m presenting to you. May I come in? Or do I need to present the search warrant too?” The partner’s soon to be ex will extract their vengeance to ruin your partner, and if that means taking you down too, so be it.
What can your partner do with their share of this partnership? Can then sell, give or gift it, or a portion of it to another weather you like it or not? Piss off your partner enough, and not only will that happen, they’ll put their controlling share of the partnership with someone who despises and hates you more than they do at the moment. Re-read the above about your court appointed bankruptcy lawyer.
What happens if your partner is deployed to Afghanistan for a year or more? Who controls his share of the partnership, and what can that non-owning controller do, and not do?
What if your partner, for whatever reason, goes into a coma for 6 months or more? Is there someone designated to control their share of the partnership? When does this control start and stop? What if the partner dies while in that coma? Does the controller still have control? If so, why? If not, then who does?
What if in a two person partnership one of the partners wants out? Is there an exit strategy in place? What is it, and what are the legal implications?
What if a partner moves to another city, state or country?
What if you want to buy your partner out? Of course, doing that dissolves the partnership since you can’t have a partnership with only one owner. But still, “what if” you want to buy them out, or they want to buy you out? What requirements and conditions have been agreed to for this possibility?
Since this partnership will consist of rental property, what if a house is destroyed by fire, hurricane, tornado, or other natural disaster? At what point does the partnership take the insurance money without a rebuild and walk away? While on the subject of insurance, make sure it’s the partnership that buys the insurance, and that the partnership is the designated payee of any insurance payout…. not the partners.
As you can see, there are a lot of “what if’s” to consider when establishing a partnership. I've only listed a few of the more than one hundred I can probably come up with in the next hour. It’s practically impossible to plan for them all too. That’s why partnerships rarely succeed. Now I’m not trying to discourage you from such an arrangement. I just want all partners to be aware of all the “what if’s” and to plan *in writing* for as many of them as all the partners can think of. What all partner’s need to do is sit down and come up with a list of “what if’s”. Don’t worry about the solution at that time. All you’re doing at this point is establishing that “what if” list, and that’s it. One or more partners may have a unique personal situation and will come up with a “what if” that nobody has ever thought of or had to consider before. So make that list.
Next, the partners sit down with a lawyer (not a tax lawyer either) to go over the list and to formulate a partnership agreement which includes and addresses all the “what if’s”, that will stand up in court should that need ever arise. What I think works best is to sit down with a lawyer that specializes in wills and estates. For the most part, they’ve seen it all when it comes to this stuff, and can probably contribute a few “what if’s” none of you have thought about yet. Everything gets put in writing as a part of the partnership agreement, and that can help the partnership to succeed. It doesn’t guarantee it will succeed of course. But doing this will significantly increase the likelihood that it will. More importantly, it has a better chance of keeping friendships intact should the partnership hit an iceberg and sink.
Now, once the partnership is established, all the “what if’s” you can think of are covered, and everything has been agreed to “in writing”, that’s when you take all your paperwork and visit the CPA or tax lawyer. Not one minute before either.
From what I’ve seen, very few who use this approach will actually make it to the tax attorney. They just can’t agree on all the “what if’s”. So if your partnership is going to fail, let it fail “before” it’s formed, and not after. Keeps those friendships and family relationships afloat and more intact that way.
