Q.
Should I form a partnership with a friend?
A.
The advantages of a partnership are that one of
the parties can donate either time, money, or
expertise that the other parties do not have.
However, even all three of those elements may
not be sufficient for the success of a
partnership.
Partnerships have
a higher failure rate than sole proprietors or
corporations, and many partnerships fail within
the first year or two. Therefore, it is very
important to have a written partnership
agreement which spells out exactly what will
happen when one of the partners dies or decides
to terminate the agreement. There should be a
detailed checklist of what happens to capital
equipment, cash on hand, and goodwill when the
partnership terminates.
A good planning
tool for a partnership is a buy-sell agreement.
This is an agreement that can be funded through
life insurance and protects one’s investment
upon death and insures family members or other
business partners of enough monies to continue
the business or support a family. Partnerships
require special tax record-keeping which
sometimes is an extra burden that the sole
proprietor does not have. Attorneys who draft
partnership agreements have checklists of the
provisions which should be spelled out to avoid
common pitfalls.
Special estate
planning techniques should also be considered
when a partner draws a will or trust to clearly
identify what happens to partnership assets. As
you can see, there are many aspects in
partnership planning for which the average
person will need competent counsel to assist
them.