Tuesday, February 28, 2006

Partnerships Gone Bad

I have a client that has been through the ringer with his business partner.

Many years ago my client formed a partnership with an individual who formed his small corporation which became the partner. They purchased some commercial property and proceeded to manage it for many years together. Over the years the relationship became very strained and sometimes downright contentious. They had some financial difficulties.

Then came the time to sell the property. This brought on even more headaches and miscommunication.

The point of the story is, my client wished to hang onto as much of his profit as possible and minimize his capital gains tax hit. To do this required some cooperation from his partner. The partner will receive no less a share of the proceeds in agreeing to amend the partnership agreement, but will not cooperate out of sheer bad will. It is an ongoing battle to settle the matter and just get out. It has taken a major toll.

Exit strategies are rarely considered when beginning a business or partnership. However, it is beneficial to plan for all contingencies and to keep excellent documentation of all transactions and agreements.

Make sure if there is a partnership or corporation, that it can be dissolved in a manner agreeable to all ahead of time. It's never too early to plan for the future. It could mean the difference of a great deal of money that could be working for you in retirement, vs being paid out with no other options.

Make sure you have good legal counsel along the way. They must also have copies of all agreements and tax returns. If you don't have all your records, the burden of proof may be too difficult to resolve.

Paula Straub


askpaula@savegainstax.com