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Partnership interest in business

On Behalf of | Oct 13, 2021 | Blog |

Starting a partnership in Minnesota has a lot of advantages and allows you to divide the work and effort of a small business between people of diverse skill sets. However, it is important to understand the concept of partnership interest because it has a big effect on how the business evolves over time, and it requires a lot of forethought and planning to get right.

What is partnership interest?

Partnership interest measures how much of an ownership each partner in a business controls. This is a simple idea; often, partners decide to just divide up ownership equally. However, the tricky part is when one or more partners leave the business for new projects, a falling out, a death, retirement or another reason.

What happens if a partner leaves?

When one partner decides to leave, the other partners generally need to buy them out, purchasing their equity and assuming their share of the liability. This can be costly, and it can also have tax implications for everyone involved as well as for the business itself. Handling this with care requires planning and, ideally, some provisions laid out in the documents defining the partnership to minimize friction and make it a seamless process.

A good business needs to be ready to handle a departing partner at any time. The more planning and discussion there is in advance, the easier this will be, and the less time and attention it will consume when it is time for one of the partners to leave. Not thinking about the partnership dissolving until it happens will cost more for everyone in the long run.