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When going into a business partnership, corporation, limited liability company or other type of relationship involving multiple owners, it is essential that the parties have a written plan in the event that the relationship goes sour or one of the owners leaves the business (whether by death, disability, choice, etcƒ). This planning is essential regardless of the whether the relationship is between spouses, relatives, friends, colleagues or strangers, and should be addressed at the commencement of the relationship, not when it's too late.

The purpose of a buy-sell agreement is sort of like a pre-nuptial agreement for the business relationship. The goal is to ensure that an objective procedure is in place to determine the business valuation and the rights of the parties when ownership interests are transferred. Furthermore, it can create a policy in which the transfer of ownership remains among those that will continue on with the business venture despite the departure of the partner / co-owner.

In the excitement of starting a new business venture, most people fail to consider the "what if" scenarios of a failed business or personal relationship. Once the honeymoon is over, you can really start to see how the relationship is not based upon a fairy tale. For example, a business jointly owned by a married couple would face probable disaster if the couple's personal relationship is under strain or subject to divorce. Who will have the right to buy the other out? How does one determine valuation? Where will the buy-out money come from? How will their other community property interests be affected?

Additionally, many business owners never consider what happens if their business partners become disabled or die. If their estate inherits an ownership interest, voting power or control over operations by a successor may be detrimental to the other partner. Additionally, what if the decedent owner is the one holding the necessary professional license to conduct the business? Many buy-sell agreements provide for a buy-out of a partner's interest that is funded by life and disability insurance. Others allow for the transfer, but take away voting and management rights from a successor (only entitling them to profit distributions, and proceeds from the sale of equity). Each solution is designed to address specific contingencies.

Finally, one has to consider community property law with respect to equity holdings in a company. The partners or other owners may face some serious issues if one of the married owners gets a divorce, irrespective of whether or not the spouse is involved in the business. This partner's equity position may be subject to community property classification, and subject to divestiture. Furthermore, if the controlling interest in a company is contingent upon the married person retaining 100% of their equity holdings, the balance of control may invariably shift by a marital dissolution. Therefore, it is extremely beneficial to consult with a competent professional to consider all potential contingencies when structuring the business entity and agreements among owners. Proper planning will ensure a customize solution that works for everyone, and can save significant amounts of time and money in avoiding litigation.

David Michail is a business, corporate, entertainment and commercial transactions attorney for the Law Offices of David F. Michail, a Professional Corporation. This article is intended for informational purposes only, and shall not be construed as rendering legal advice. For further information on this issue, or to schedule Mr. Michail for public speaking engagements related to this or other business or entertainment law topics, please call 310-559-4333 or email Mr. Michail at david.michail@michaillaw.com.