I've started a business with a partner and am drafting a basic partnership agreement. I want to include a death clause that says that in case of death to a partner, the remaining partner has the first right to purchase the partner's share at fair market value, versus allowing the partners share to be bequeathed to a third party. Is there a "standard" clause to state/handle this situation and is it pretty typical that a partnership agreement would include this component?

When I started my business, I had myself and three other partners. Less than six months later, it is just me and one other partner. Without our Shareholders Agreement, we would have been in a real mess right now. I worked almost three straight months developing the agreement by myself (I'm not a lawyer). I finally had a lawyer review it at the end and he was shocked how detailed I had gotten. He made a couple minor changes, but I saved myself tons of money in lawyer's fees.

As far as a standard clause for "death of a partner" goes, it may vary state to state, but I think the estate of the partner (usually his family) gets his shares (or value of the company). Of course, the executor of his estate can claim that your company is worth more and might turn the screws, if you know what I mean.

The way our shareholder agreement works, since we are a start-up (low value), the company has two options concerning death depending on if the corporation has taken out life-insurance policies on the major shareholders. If there is a policy, the share's are forfeited at $0.00 a share, but the estate gets the full value of insurance policy (healthy sum of money: equal or greater than the shareholders value). If there is not a policy, the share's are required to be sold to the other shareholders or back to the company at a fair market price. This is to make sure control of the company is maintained, but also for the family to be properly compensated for their loss.

I would recommend protecting yourself with either a corporation status or an LLC. You need some protection. This guy maybe your bestfriend in the world, but money does strange things to people. Layout the rules ahead of time to avoid future battles.

Thanks very much for taking the time to share with me how you were able to handle this situation. I really like the idea of having life insurance policies in place as a method of ensuring that both the business and estate fare equally well.

I certainly do see how the process of defining the value of the business can be a real nightmare with too much money going towards legal fees.

I'm still in a quandry over the idea of being able to leave my share of the business to my children. The idea of creating a family legacy through the business is very compelling, while at the same time frightening knowing that the same would apply to the partner and his family.

While I'm not yet definite on which path to take, your input will make it a whole easier. Thanks again.

I agree with OhioDave. Money does strange things to people, even family. I know this one person who started a company about 15 years ago with his wife & son (from a previous marriage) in his apartment. The company grew & grew. They owned the buildings where they worked.

In 1997, they sold 50% to another company. It was still thriving & he executive committee were all friends. He & the wife split. Then that meant that he owned 25% & the wife owend 25% & the other half was owned by this corporation. They ended up having to sell it (got a good price $287 million), but the son was very angry. It was "supposed" to be his business. Now there is only one person left there from all the family friends & he is not leaving.