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Tax Guru-Ker$tetter Letter
Tuesday, June 15, 2004
Business Pre-Nup
As I've said on many occasions, going into business with someone is very similar to getting married. It still amazes me to see how many people enter into business co-ownership with someone they barely know. What's even more frightening is how few people actually put the terms of their business relationship into writing. Consider it a pre-nuptial agreement for a business.

Spelling out the terms of the relationship, especially how to terminate it, is a lot easier to do up front when everyone is on good terms. The alternative is to run up a lot of legal bills fighting over a split. It's a classic "pay me now or pay me later" scenario. The legal fees to draw up a basic partnership or management agreement in the beginning are a drop in the bucket compared to having to pay for years of litigation when things go bad.

While not all marriages will end in divorce, every business relationship will eventually come to an end, even if it's just from the death of a co-owner. How that person's share is to be handled is a very important issue that needs to be put into writing when the business relationship begins.

This was prompted by the following email I received recently:

Re: bad partner in s corp.
just wondering if you had any advice for ridding my partner in an s corp we formed. we are equal in amount of shares owned, he is lazy, does nothing and has the worst work ethic I know. Please help.

My reply:
I'm assuming that you didn't have a formal written partnership or management agreement drawn up at the beginning that would have addressed this situation.

It's basically going to involve negotiating with your co-owner. There are several optional strategies that could be used, based on the details of your particular situation.

You will need to consult with an attorney or corp tax pro to see what would work out best for you. I can't do any more in a medium such as this. Ideally, you and your co-owner should both consult with the pro; kind of like marriage counseling.

Good luck.

Kerry Kerstetter

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