If a Business Partner Becomes Disabled, is He Still a Partner?

Without proper business planning in place, your business can face serious financial set backs if your business partner becomes disabled

Q: My business partner had a stroke about 2 months ago and has been unable to actively work in our business. We have a corporation and he is a 50% owner of the business. Because of his disability, I’ve had to pick up for all the slack and do his tasks on top of all of my tasks.  I wouldn’t mind this if this was a short term thing – he and I have been in business for years and we’re close. But, it looks like he’s going to be disabled long term and isn’t likely to return to actively working in the business. Is he still my partner? Does he still have a right to draw a salary and profits? (We don’t have a buy-sell agreement or any other contracts in place as far as I know).

A: Your problem is not as unusual as you might think. According to some insurance statistics Americans actually have a far greater chance of becoming disabled during their working career than they do of dying. And, the chances of disability vs. death are more than six times greater for younger workers. On average, there is a 1 in 5 chance of becoming disabled between the ages of 35 and 65.

Without a buy-sell agreement, your partner remains your business partner during his disability; so he remains a shareholder in your corporation and has all the rights that a shareholder has under the bylaws of your corporation. As far as his salary is concerned, that may be a little more complicated. The answer to your question may depend upon how you’ve paid yourselves over all these years of being in business. If you had a salary that you both drew no matter how much or how little you worked, then he still may be able to draw his salary even though he’s not actively in the business.

This situation underscores the importance of having a buy-sell agreement in place before something like this happens. A buy-sell agreement defines what happens when a certain triggering event happens such as death, disability, departure or dissolution. The agreement spells out an agreed-upon formula for what happens, what value is received on all sides and how that value is received.

Buy-sell agreements can also often be “funded” or supported with life insurance and/or disability insurance. If you and your partner had a buy-sell agreement that was funded with disability insurance, then the disability insurance policy could be used by you to “buy out” his interest in the business.  To read more about how buy-sell agreements can help protect your business just click here.

Attorney Andrew Garcia, Your SouthCoast Business Attorney

Attorney Andrew Garcia, your SouthCoast Business Attorney, is a principal of Phillips Garcia Law. He’s created a Business Legal Planning system that will walk you through the process of forming your Massachusetts corporation. Locally he has appeared live on WBSM-AM radio and nationally on NBC’s Today Show and Fox’s Fox & Friends program. If you are interested in learning more about his Business Legal Planning services, just contact him at agarcia@phillipsgarcia.com or by calling (508) 998-0800.

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