Starting and building a business can provide a way to personal and financial success.  Watching your business grow is exciting!  While most small business owners strategize and plan for ways to expand their product line, services, and customer base, many small business owners don’t plan for events like the death of a key employee or business partner.  The type of small business that is most vulnerable to this kind of loss is a partnership.

What is a Partnership?

 Actually, you may very well be conducting your business as a partnership without realizing it. Under California law, a “partnership” is an association of two or more people who agree to carry on a business as co-owners and share the profits.  Unlike a corporation, a partnership can be created without legal formalities, although a written partnership contract and the related legal documents can be important to long-term success. 

How a Cross-Purchase Plan Protects Your Business if Your Partner Dies

If there are only a small number of owners working every day to provide a product or service, negotiate with vendors and customers, manage shop, and attend business meetings, you can imagine the impact that the unexpected death of one owner would have on the ability of the business to survive.  This is especially true when you consider that the business would, at the same time, be legally required to pay out the value of the deceased partner’s share to his or her heirs.  This could force the sudden liquidation of the business, or use up its cash cushion and require a sale of business assets.   

One way you can protect against the impact of such an unfortunate situation is with a “cross-purchase plan,” drafted by a skilled business attorney and signed by each partner.  In a cross-purchase plan, each partner agrees that the remaining partners will have both the duty and the right to purchase a deceased partner’s interest in the business.  To fund this purchase, the partnership takes out a life insurance policy on each partner for the benefit of the surviving partners.  The cross-purchase plan typically sets the buy-out price at either a pre-determined amount or an amount determined by an independent valuation of the business at the time of death.  The surviving partners then use the life insurance money to buy the shares of the deceased partner, and the money goes into the deceased partner’s estate and eventually is distributed to his or her legal heirs. 

Purchasing a life insurance policy to benefit you in your role as a surviving business partner is not something that may naturally occur to you when you start or formalize your business.  But if your business is the source of your family’s income or the beginning of a legacy you hope to leave behind, a cross-purchase plan with a life insurance policy on your partner(s) can be your best protection.  If you are the surviving partner you can not only preserve your business but also satisfy the financial needs and legal rights of your deceased partner’s family, while providing the same sort of protection and peace of mind for your own family if your business partner survives you.

At San Diego Law Firm, our experienced business attorneys understand the passion and work that goes into operating a small business. A cross-purchase plan is just one of the many beneficial strategies available to you when you formalize your partnership, whether it is new or ongoing, with a written partnership contract and other related legal documents.  We can prepare every document you’ll need to give your partnership the greatest legal, financial, and tax benefits, and advise you on the wide variety of ways you can protect both your business and your personal finances.  We remain available to help you with both minor and serious legal problems whenever you need us.  To learn more or set up a consultation, please call San Diego Law Firm at (619) 794-0243.