How to Protect Your Business When Your Partner Files for Bankruptcy?
Partnerships are business enterprises involving more than one party. People usually form partnerships because they know it’s more likely to succeed in a business with a partner than without one. Of course, there are inherent risks in having business partners. In order to avoid unexpected circumstances, make sure to involve an attorney from the outset to draw up a legal agreement. This agreement should include besides each partner’s duties and responsibilities, also a buy-sell agreement.
Why is a buy-sell agreement important?
A buy-sell agreement is a contract, a written document between business owners, made up of several clauses that control business decisions such as:
· Percentage of ownership
· Allocation of losses and profits
· Making decisions
· Who can bind the partnership
· Resolving disputes
· The death of a partner
Every business owner with partners should be aware of the importance of buy-sell agreements and should have a well-drafted one. When a business continues to operate without a buy-sell agreement the financial risk increases each day and as a business enterprise grows, the risk increases in tandem. The costs of having a well-drafted buy-sell agreement in place are minimal compared to its benefits. Even if you are absolutely confident about the terms of your buy-sell agreement, is still wise to have an attorney to take a look at it. It is also important to keep the buy-sell agreement up to date by revising it at least every three years.
What happens when your business partner files for bankruptcy?
An effective buy-sell agreement can also state how the partnership handles individual partners filing for personal bankruptcy. Medical bills, personal credit card debts, divorce or other failed business loans, are all possible and shared reasons for someone to file bankruptcy. If one of the partners files for bankruptcy, a buy-sell agreement can provide protection for his shares from being exposed to creditors who could take possession of the shares.
In case that the owners do not have a carefully drafted buy-sell agreement, a personal bankruptcy could impact the business as well as the other owner(s). If the bankrupt co-owner does not have enough assets to cover his bankruptcy, the bankruptcy trustee may liquidate the business and use the profits to satisfy the bankrupt co-owners debts. Being aware of this risk, most companies have buy-sell agreements with clauses that deal with such situations.
If a co-owner is about to file for bankruptcy, he must inform the other co-owners. Then this is treated as an offer to sell his ownership interest in the business to the co-owners. All the money paid in this buyout will go towards the co-owners bankruptcy case.
What is the best way to value a company when a co-owner is being bought out?
The purchasing price can be fixed and periodically re-determined or the owners can establish an agreed method for appraisal and valuation. An already set valuation formula, it can save time and effort when it comes the time to buy out a co-owner. To value the company, the owners can hire an appraiser at the time of sale. However, many business owners hire their own assessors.
A bankruptcy attorney will be able to protect your business when a partner goes bankrupt
To protect your assets and your share of the business, talk to a bankruptcy lawyer as soon as you suspect that your business partner may file bankruptcy.
About the author:
Kevin S. Neiman, the President of the Law Offices of Kevin S. Neiman, pc, has developed a successful bankruptcy law practice based on his commitment to providing top-tier legal services. Kevin S. Neiman specializes in practice areas arising out of distressed situations such as personal financial problems, business financial problems, and commercial disputes, offering a winning combination of legal knowledge and experience along with dedication and compassion for all of his clients.