A partnership, by definition, consists of two or more persons and, therefore, one individual does not a partnership make. But you bring up the important--and often overlooked--issue of what happens when a partner is disassociated from the partnership. Ideally, this issue should be addressed in the partnership agreement. In addition to defining the terms by which a partnership is to be owned and operated, a good partnership agreement will include a "buy-sell" provision to address what happens to the partnership in the event of a partner's death, divorce, disability, bankruptcy, resignation or retirement.
(article continued below ...)
 

A buy-sell agreement is a binding contract between the partners that defines: 1) What events will trigger a buyout, 2) the price that is to be paid for the disassociating partner's interest in the business, and 3) who can buy the dis-associating partner's interest (e.g. outsiders vs. other partners in the business).

In the absence of a buy-sell agreement, state laws regarding partnerships will apply--and this could have a negative outcome for you. The departure of a partner, for example, might result in an automatic dissolution of the partnership and forced distribution of assets and profits. If a partner dies, becomes incapacitated or gets divorced, you might unwillingly inherit the partner's spouse (or ex-spouse) as your new partner in the business. Likewise, if a partner decides to sell his interest to an outsider, you could end up having to share your business with a stranger.

Planning and preparation for certain events that could potentially affect a business partnership are just as important as running the business itself. A buy-sell agreement can help you prepare for such circumstances and maintain control of important business decisions.

Chrissie Mould