Tag: Partnership Agreement

Buy Sell Agreements

Sanjiv Gupta CPA - 8 years ago
Understanding the Buy-Sell AgreementBusiness owners with partners can protect themself by having a buyout agreement (aka buy-sell agreement) in place. This agreement allows stockholders to purchase partners' interest in the company under certain triggering events such as retirement, or death. The agreement can also be structured so that company partners have the first right to purchase the interest in the company.The common type of buy-sell agreement are:1.) Stock-repurchase agreement2.) Cross-purchase agreementThe first one is commonly used in small businesses. It allows the company to buy out the departing owner's interest. For example, if one of the partners decides to leave the company, his or her stocks can be purchased by the company thereby increasing the share of other partners in the company.A cross-purchase agreement is a bit different. Instead of the company purchasing the stock of the departing partner, remaining owners are allowed to purchase the departing owner’s stock.Who needs a buy-sell agreement?Any business with partners should have a buy-sell agreement in place. This agreement should be drafted and signed as soon as the company is formed. The agreement will protect the owner leaving the company along with partners remaining in the business. A buy-sell agreement can help businesses avoid costly conflicts when the buyout time comes.What methods are used to set the price?Pricing should be based on the evaluation of your business. This is where your CPA will come in. IRS section 2703 prevents a business owner from picking a random low value for the evaluation purpose due to estate planning laws. However, your CPA or lawyer should be able to help you come up with a fixed price agreement.The better way to evaluate your business is to use the valuation process agreement. It is a good idea to engage an independent valuation analyst to determine the fair market value of the business. There is a good chance that a fixed value agreement may undervalue or overvalue your business. However, an independent valuation will get you much closer to the correct number.You can engage an independent valuation analyst on a yearly basis to determine the correct value of your business and update your buy-sell agreement accordingly.Do you have a buy-sell agreement for your business?

Essential Elements For All Business Partnership Agreements

Sanjiv Gupta CPA - 6 years ago
After you have chosen the perfect business partner, it is essential that you cover all your bases when you set up your partnership agreement. If you can afford an attorney, it is a good idea to have one draft of the agreement. At the very least, you should hire an attorney to review the partnership agreement before you sign it to ensure your interest is covered.What Is The Purpose Of A Partnership Agreement?This agreement has many purposes but the two most important purposes are dispute resolution and the business structure. Even the best relationship has disagreements especially when there are a lot of decisions that need to be made. When your partnership agreement is crafted carefully, it will outline exactly how disputes will be handled before they happen, instead of in the heat of the moment.In addition to providing dispute resolution, the partnership agreement forces the partners to think about how the business is going to run and be structured. This can minimize potential misunderstandings and get everyone on the same page from the beginning.Critical Elements That All Business Partnership Agreements Must HaveBusiness Name: The name that the company will be operating under.Purpose: A broad statement of the business’s purpose. Leaving the purpose broad will provide flexibility for the company to adapt over time.Workload Structure: The partnership agreement should include how the workload will be shared. The following questions will help you determine what should be included regarding the partners’ workload:Will the partners be expected to have set work hours?Will all of the partners be working the same amount of time? Or will one partner work less or more than the others?How much vacation time will be given to each partner, each year?Will each partner’s role be full-time or can the partner conduct another type of business outside the company?If yes, what another type of business that is allowed to be conducted?Partner Contributions: Determine exactly what each partner will be contributing to the business such as cash, physical property (office space, equipment, etc.), and intellectual or other property types (client lists, software codes, etc.). After you have all contributions listed, discuss with the other partners what restrictions there will be on those contributions, if any. The following are some examples of the types of things that should be discussed:Client Lists: Does all of the revenue from the clients that a partner brought to the business flow to the business? Or does a percentage of the revenue, from those clients, flow to the partner directly?Personal Property: If a partner brings the property into the business (such as a copy machine, computer or lawnmower) does the property become the business’ property?Intellectual Property: If a partner brings the intellectual property into the business (such as a software code), does the business own it? Are the other partners allowed to modify it?Partners’ Compensation: All partnership agreements should list the terms of each partner’s compensation. The following questions should be discussed to determine what should be included regarding compensation:Will each partner receive a salary? If yes, how much will they receive and when will it be disbursed?If a partner receives less salary, will the difference be made up for in the future?Will the profits be reinvested in the business?If yes, when will profits be taken out?How will profits be divided up between the partners?How will business losses be handled?Ownership: Now that you have determined the contributions, workload, responsibilities, and compensation, you need to agree on how exactly the ownership should be split. This is a difficult calculation and can cause problems between partners before you even finalize the partnership agreement. Things to consider:Money raisedRevenue generatedContributionsOriginal conceptFull-time commitmentReputationBusiness Authority: The partnership agreement should state the authority that each partner has. The following questions need to be answered:Does each of the partners have the authority to enter into contracts (sign) on the business’ behalfWill the business have a line of credit? Depending on the structure of the business that is chosen, all partners may be held personally liable for the business’ creditCan each partner make purchases for the business without first consulting the remaining partners? In general, there is a monetary limit set. The partners must first get the other partners’ permission if the purchase is above the set limit.Death Or Disability: The partnership agreement should state what happens to the partnership if one of the partners dies or if they become disabled and are unable to participate at the same level. To prevent heirs of the deceased partner inheriting a portion of the partnership, partnership agreements normally include a buy/sell agreement.Partner’s Exit: The agreement should state the terms of a voluntary and involuntary exit. The following questions need to be addressed:What will happen if a partner would like to leave the business to pursue other interests?What circumstances would a partner be able to be forced out of the partnership?Dispute Resolution: Even in the perfect partnership, there will be times where the partners are unable to agree about a topic. The partnership agreement should state how disagreements will be handled. That way, when an issue arises, you will know exactly what the determining factor will be. There are many ways disputes can be handled including:One of the partners has the final say on a portion of the business.The vote is based on the percentage of ownershipPartners use an external advisory board to resolve any disputesPartners use a mediator to resolve any disputesPartners agree to arbitration, mediation or litigation in extreme cases New Partners: The partnership agreement should include the process of bringing a new partner in. How will it be decided? Majority vote?Selling The Business: What are the exact circumstances that the business can be sold? This will probably be included in the Buy/Sell Agreement.
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