How To Secure Your Partnership Financially?

What is a partnership?
A partnership is a formal agreement and a form of business where two or more people share ownership, responsibility, management, income and losses of the company. Under this, two or more people combine their resources and agree to share risks and profits. There are several tax benefits for the same as well. There are many advantages and disadvantages of a partnership, a good partnership can lead to more profits and better business ideas for growth and expansion where as a bad partnership can lead to heavy debts, losses and bankruptcy. Sometimes when a partner leaves, you will probably have to value all the partnership assets, repay them their share of investment and this can be costly. There is a heavy risk involved, the question is ‘how have you planned for this financially’?

It takes a lot of work to build a successful company. Maintaining its success is much more difficult, and dealing with the loss of a partner can be the most difficult circumstance of all, particularly if the partner dies. When that happens, your deceased partner’s share in the business usually passes to his/her spouse, either by terms of a will or simply by default as the primary heir. This transition can pose a serious issue for your business if you haven’t prepared for it.

If this occurs, one option is for the spouse or an adult kid to step up and resume the former partner’s ownership interest in your business. All that is left to do is officially welcome your new team member and start getting to know one another. The second alternative is to buy out the portion of the deceased partners and take full ownership.

Buying out your dead partner’s share can also be a thorny proposition, because it raises two rather difficult questions: How do you accurately value your company, and where will the money come from?

While determining an appropriate valuation for publicly traded companies is often straightforward, doing so for small, privately held businesses is more challenging, and even after you have a figure, it may be challenging to raise the necessary capital. You might have to borrow, but that means the business will have to pay to service the loan. especially when the legitimate heirs of the deceased partner may request a share from the surviving partner. The question then becomes how the business or remaining partners can make arrangements to buy the stake from the partner’s legal heirs.

A better option would be planning for such a circumstance in advance. The partners in the company can sit down and discuss about this along with their financial consultant and legal team if needed. You’ll pay a small fee, but you’ll also spare yourself a lot of money and heartache. It is wise to invest in a “key-persons” coverage plan that will give money to keep the firm running and buy out a surviving spouse’s share in the case of death or disability. There are several investment alternatives that will cover the expense of such scenarios. The goal is to purchase the dead partner’s stake without negatively affecting the company’s financial situation.

In the worst-case scenario, if everything goes wrong for the company, your deceased partner didn’t leave an heir who could take over, you couldn’t find a new partner to join the business, and you had no way to acquire money to buy out the estate’s stake. If that occurs, you might be left with little choice than to shut down the company and liquidate its assets, or to completely sell it off. Because the company is normally worth more than its desks, computers, vehicles, equipment, and machinery, this is usually the absolute last option.

That would be a nightmare for any entrepreneur, given the emotional and financial costs of starting a business. The likelihood of this danger is the best justification for addressing your requirement for a partnership succession plan right now to protect each partner and the business as a whole.