Partnership Disputes, Litigation, Dissolutions

What you need to know about Partnership Buyouts

Gifting from one generation to the succeeding generation requires an appraisal to satisfy the IRS regulations. The fair market value must be defined and reported in a complete formal report which adheres to the Uniform Standards of Professional Appraisal Practice (USPAP).

A great tax minimization strategy involves gifting ownership in interests less than 51% of the total ownership interest. When gifting non-controlling (minority) blocks of ownership, the value of that block of ownership is treated to a discount as it is less valuable than the prorated ownership basis. For example, a company worth ten million dollars would be taxed at that value while a 49% interest in that same company may be worth three million dollars ($3,000,000) due to the discount recognized by the IRS for non-controlling ownership interests. The amount of the discount varies and must be supported by thorough analysis citing the method used in arriving at the discount rate. Appraiser spend thousands of dollars every year to have access to data used in deriving what is a supportable discount or premium.

Don't Wait Until It's Too Late

How the individual partners will deal with the death or disability of the other partner is too often overlooked in all the excitement of launching of a new venture. Making sure an attorney has drawn up proper partnership agreements is an essential step in protecting each individual partner’s interests in the business. Careful consideration should be given to the funding provision of the buy-sell agreement or buy-sell clause within the partnership agreement.

Think about it for a minute: if your business partner died or became disabled, how would you handle it? If your partner is gone or can’t work he or she is of no economic value to your business. Yet your business partner or their estate still owns 50% of the business. Think of it from the disabled partner or his estates’ (if deceased) point of view as well. He or she or their family deserves the fair value of the business that the partner helped build if he or she dies or becomes disabled.

There is often a mandatory buy-out provision or a "right of first refusal." This allows the surviving or non-disabled partner to wholly own the business without the interference of the deceased partner’s estate or without the drain of a disabled and non-productive partner. A mandatory buy-out provision also assures the business interest of the disabled or deceased partner will be purchased.

There are several ways of funding a Buy-Sell agreement. These methods include personal funds of buyers, a sinking fund within the business, borrowing funds, installment payments to the disabled partner or his/her heirs, or special insurance policies. These include the Stock Redemption Plan and the Cross-Purchase, among other methods.