Owning a business brings a lot of challenges. One way to handle those challenges is to go into business with a partner. This reduces the stress of dealing with business operations and spreads the work out between two people.
While a partnership might have been the best option when you started your business, that doesn’t mean it will always be the right choice. Eventually, you may decide that you want to fully own the business.
Whatever your reasons, if you are considering buying out a business partner, you should do it the right way. If you do it correctly, you will be the sole owner of a successful business. However, if you do it poorly, you could find yourself in significant legal trouble or drowning in debt.
Do Hire a New Corporate Attorney
While your business probably works with a corporate lawyer, you may want a different attorney to represent you during the dissolution of a partnership. Your old corporate attorney may have a conflict of interest because they used to represent both you and your partner.
Don’t Surprise Your Partner
Even if your partnership has begun to go sour, you shouldn’t surprise your partner with a sudden buyout offer. Discuss your plans and let them know that you are considering going solo. The more civil you can keep negotiations, the more likely you will be to get a fair deal from your soon-to-be ex-partner.
Do Secure Financing
Running a business independently is more than twice as difficult as running a business with a partner. And the costs involved in purchasing half the business are probably higher than you suspect.
Furthermore, once you own the business alone, if there are any setbacks or downward turns, you will have to suffer them without help. This means you should both secure enough money to purchase the other half of the business and ensure you have a relatively large safety net to help you through the first year of running the business solo.
Don’t Ignore Tax Liabilities
Even if you have correctly determined how much money you will need to purchase the business and be safe during the first few years of running it alone, you might still have forgotten about taxes. Tax liabilities change significantly when you switch a business from a partnership to sole ownership.
IRS tax code 736 regulates tax liability for payments to a retiring partner. Like many IRS regulations, these rules are complex. To avoid making a mistake on your first tax return after going solo, you should let an experienced tax attorney handle both your IRS return and your Arizona small business taxes.
Do Get a Valuation Before Buying Out the Business
While you probably have a sense of how much your business is worth, you will want to know the exact value before you attempt to buy out your partner. If it is worth more than you expected, you may need to secure more financing. And if it is worth less, you might not be able to make a living if you own it solo.
You shouldn’t be secretive about the valuation your business receives. If you try to hide something from your partner, that could get you in legal trouble. And they can always get a valuation on their own if they don’t trust you are being honest with them; this makes your secrecy meaningless.
Don’t Ignore the Option of Selling the Business
If the main reason you are considering buying out your partner is that you no longer get along with them, you may want to just consider selling the business rather than buying out your partner. You can then use the money you get from the sale to start another business independently.
Ultimately, this may be the better option for you. It is also generally a good choice if the reason you are breaking the partnership is because you are getting a divorce. This will speed up the divorce proceedings as long as the business sells quickly.
Contact Ernst, Brown & Draper Before Buying Out a Business Partner in Arizona
Regardless of the reason you are considering buying out a business partner, you should never try to do it alone. The legal hurdles to buying out a partner are quite significant. An experienced business lawyer will help you get through the process smoothly.
At Ernst, Brown & Draper, we have helped many clients end partnerships with minimal difficulty. Contact our law firm today to schedule a free consultation with an experienced corporate attorney who will help ease the process.