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Our last newsletter The IRS Dirty Dozen identified the top 12 IRS targets and schemes for 2008 and how to avoid these tax traps…... minimizing taxes is an aspect of asset protection and wealth preservation, but keeping it legal is essential. Our article today shifts gears to look at a common mistake I see business and professional practice owners frequently make, and begs you to honestly answer the question:
Are you really protected from your partners if you have a falling out?
Owning and operating a closely held business or professional practice is like a marriage, in more ways than one. During happy times there are wonderful challenges and opportunities. But when the relationship turns sour, partners can become the worse of enemies.
The steps you take from the beginning of a relationship are essential to reduce your losses – and stress levels – later, when problems arise.
And most importantly, the steps you take today will ultimately determine whether or not you adequately protect your assets later.
Most closely held businesses and professional owners often provide services for the company or practice they own. It may sound strange to you, but as an owner providing these services you are also an employee. Did you know when there are multiple owners you may end up out of a job, even though you are still an owner?
Think it can’t happen to you?
I remember one client in particular from years past that never gave it a thought that one day he might be “fired” by his partners. But since he was not a majority owner of the business he learned the hard way one morning when he arrived at the office and found all of his personal items packed in boxes stacked in the corner.
After 25 years of a good relationship with his partners, one day they decided he wasn’t needed anymore. He was informed he was terminated as of that day and if, and when, the business showed a profit in years ahead they would send him a dividend check.
How much salary or expenses can be paid to the other partners that control the checkbook once you are gone? How much will be left over for your share of ownership interest?
What should you do?
Your first line of defense as a co-owner of a business or professional practice is to have in place a written Employment Agreement. You’ve probably heard of them by flashy names such as Golden Parachutes or Severance Agreements, but they all boil down to the same thing: defining your relationship as an employee.
When business situations get desperate, business owners are often forced to take desperate measures to survive. As an owner of a business or professional practice, unless you are in complete control of every aspect of the operation, you could literally be pushed out the door.
Remember, in the eyes of the business structure, without an Employment Agreement, you may be nothing more than an employee even though you might be an owner.
In most states across the U.S. and elsewhere, employer and employee relationships are terminable at will by either party. As a general rule, those with more control can fire you or any other employee, with or without cause. Of course there are legal exceptions to this, but this is the general rule followed by most states, and frequently outside the U.S.
And it makes no difference that you have an ownership interest in the company, or that it might be failing and in a desperate situation.
If other owners, or new owners, or a board of directors now believe that you are not carrying your weight, or that new, younger, fresh blood would be more beneficial to the survival of the company, you too might be gone in the morning with nothing more than a “thank-you-very-much”, if that.  
The Employment Agreement should strictly define the reasons you can be fired, setting standards "for cause" termination. "For cause" means that there must be specific reasons to terminate you such as fraud, illegal acts, failing to reach specific business goals, and other similar guidelines.
And too, it should define duties, salaries, bonuses, and severance pay if you are terminated, with or without cause. But an Employment Agreement is only one portion of a two-part formula that every business owner should consider in protecting business interests.
A second line of defense for a business owner is a Buy-Sell Agreement. This is an agreement between the business and the partners, which defines the relationship between them. This is different from the Employment Agreement since that agreement defines the relationship between the business entity and the employee.
A properly drafted Shareholder's Buy-Sell Agreement answers many questions.
Under what conditions could the other partners or the business or professional practice force you out? What reasons could your partners force upon you a sale of your business interests? And at what price? What are the formulas to be used to arrive at a fair price? How would the purchase price be paid for?
What about death of one of the partners? How can you avoid having a confrontation with heirs, a spouse or children, now trying to run the business following death?
The above and many more issues are all the topic of a well-drafted Buy-Sell Agreement.
This is a critical tool defining the business relationship between partners and can help reduce or eliminate problems when a business is struggling to survive.
Importantly, an owner needs to combine, or use the synergy of both the Employment Agreement and the Buy-Sell Agreement to properly protect his or her business interests. One without the other is like trying to row a boat using one oar on only one side of the boat.
It is the combined approach of the two that gets you where you want to go for protecting your business interests, particularly when the business takes a turn for the worse.
Combining legal techniques, and the use of synergy, are important and repeated topics in "How to Legally Protect Your Assets."
If during a business downturn other business owners try and force you out, without the above tools you are left in a difficult situation.
Worse yet, absent an Employment Agreement and Buy-Sell Agreement you could be forced to file a shareholder's suit in court to protect your interests. Expensive expert business valuators will probably need to be brought in, along with financial planners for future dollar valuation. It certainly happened to the unsuspecting client that was caught by surprise that dreadful morning.
The attorney's fees, costs and expenses can be enormous as all sides quickly posture for the stronger position. And what effect will this litigation have on the survival of the business?
And can a struggling business withstand the expense and pressure from the challenges brought on by other partners in an adversarial relationship? All of this might be avoided if you properly use these tools to protect your ownership rights.
Perhaps the worst scenario I've witnessed is when two individuals go into a new business as equal partners. What happens when there is a stalemate on decision-making? Who is the tiebreaker? Equal partners set the stage for friction and conflict in the business relationship.
Too often, even successful businesses suffer because equal partners cannot agree on a simple matter. Equal ownership should be avoided at all costs, or at a minimum, spell out how to deal with these issues in the Buy-Sell Agreement and the Employment Agreement.
There are other options, but none as good as avoiding two equal business owners in the first place.
Worthy of note is that it is not advisable to name spouses as officers or directors or co-shareholders in your business or professional practice when it is not necessary. Not only can this help prevent spouses from being named in litigation should shareholders or officers or directors be named in a suit, but will also help avoid serious complications in the event of divorce.
Keep in mind that single member owners, managers and officers are often named in litigation along with claims against a business, and can be costly in both monetary and non-monetary terms.
If your business was struggling or your partners were disputing issues, how protected are your assets? If you pass on or suffer a disability, would the business survive? Would your heirs survive the business? Would the business survive them? What plans have you made for business succession if one of a dozen scenarios came your way?
If all conceivable issues between business partners are fully spelled out from the beginning in a relationship, and updated as time necessitates, you can provide for the best possible protection for your business interests. The true test of the importance of these tools are usually demonstrated when the business is struggling to survive.
Have in place a predefined guideline as to how to deal with the relationship between the partners and the business with its employees.
For many owners, their biggest asset is their business, yet they fail to take the necessary steps to protect themselves from the many possibilities that can separate them from their wealth after so many years of hard work.
You must take the time and effort "now" to think through all the possibilities, and look for solutions.
If your doors are locked when you arrive tomorrow, or you suffer a disability, or worse, a death, then it is much too late to act.
Whether you own 10% or 50% or even 100%, what have you done lately to protect your assets?
Remember, the goal of asset protection is not about hiding money. It is the preservation, safety and peace of mind that allows for financial independence and freedom to make choices in life…. but you have to protect your assets first.
For more information about stateside and offshore asset protection planning see "How to Legally Protect Your Assets."  
Until next time.
David A Tanzer, Esq.
JD, BSc, Ph.D (Hon)
For more information visit or email to David is the author of “How to Legally Protect Your Assets” and “Offshore Living and Investing.”

David A Tanzer & Assoc., PC.

Vail, CO USA:
Tel. (970) 476-6100
Fax (720) 293-2272

Auckland, New Zealand:
Tel. (64) 9 353-1328
Fax (64) 9 353-1328

Brisbane, Australia:
Tel. (61) 7 3319 6999
Fax (61) 7 3319 6999

(Licensed to Practice Law in U.S. States & Federal Courts;
Assoc. Member Auckland, N.Z. District Law Society - Foreign Lawyer; &
Assoc. Member Queensland Law Society, AU - Foreign Lawyer)
(C) Copyright 2008 David Tanzer all rights reserved. The comments herein are not intended to constitute a legal or tax opinion regarding any specific legal or tax issue as additional issues may exist; does not reach a conclusion with respect to any specific legal or tax issue addressed herein or any additional issues not included; and cannot be used for the purpose of avoiding legal or tax obligations or penalties with respect to issues in or outside the scope of matters discussed herein.
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