Barrett R. King, J.D.
No one starts a business (or a marriage, for that matter) with the intention of leaving it. Yet it does happen. Partnerships, like marriages, take quite a bit of work between the partners to maintain stability and a healthy dynamic. When clients come to Elville & Associates for estate planning, we ask whether there are business interests in the portfolio. If so, we routinely review operating agreements, partnership agreements, and shareholders’ agreements to determine the rights and responsibilities of the owners. We want to be sure that, in the event of death or disability, the client’s estate is positioned to sustain the operation of, or transfer the business, as the client would desire.
Even if the event of death or disability is addressed appropriately by the written agreement, we also want to be absolutely sure that steps are taken to address any dispute or unexpected rift that affects the business and drives the partners to want to go their separate ways. A partner’s departure from a business raises issues of business law such as adequate compensation, non-competition agreements, the protection of customer lists, as well as copyright and trademark law.
A unique example recently appeared in this writer’s practice. Four musicians approached the office, seeking to protect themselves in the event their musical group ran into creative differences and a band member wanted to leave. Just like many traditional businesses, the plan of action was as follows. First, this band had a discussion about the direction they wanted to go in and how profits and losses would be shared. Then, we worked to create an agreement. We formed a company and had the company own the group’s name.
The name was trademarked.
Next, we committed the notes from the above-mentioned discussion to writing in the form of a partnership agreement. We discussed what each member would bring to the company in terms of startup capital, equipment, and intellectual property as well as ‘sweat equity’ – in this case, who was the primary songwriter and how the royalties and other revenue would be attributed to each member.
Certainly the goal is to see that their business and their ‘product’ will succeed, but this foursome knew that the possibility that someone wanted to leave (or that the rest wanted to kick this person out) could arise at any time. So the agreement outlines how someone can leave or be forced to leave. It outlined what that person would take with them, which can be different depending on whether departure is voluntary or mandatory.
You may not be in the business of music, but even if your business is selling widgets to a manufacturer of equipment, or if you are a consultant along with one or more other partners, the need for a clear understanding of the possibilities, and the certainties such as death, is still there. Meet with an attorney. You will be advised as to whether the attorney will represent you or the actual company, and your attorney will explain that distinction and why it matters. Do not let your business collapse into ruin because you only envisioned the good times. Even the good times can cause partners to disagree about how revenue is shared. It is utterly cliché, but it applies in both estate planning and business planning: fail to plan, plan to fail.