partnership query

[Murgord]

Hi guys I am in partnership in a business that had 3 partners with equal shares in the business, the other 2 partners are looking to retire in the next year and have both brought their 2 sons into the business giving them about 10 % each of their 33.3% and eventually giving them half of their 33% each when they retire , their sons are all in their mid 20’s the trouble I have is I only have one son who is starting in the business in the next few weeks and is only 16, I have said that I am quite happy to drop my shareholding to 20% so all the lads would have 20% each creating an equal partnership like it was before but obviously my son is too young to become a partner at 16 all the others were made partners in their mid 20,s I have about 250k capital showing in the business accounts with the other partners having anything from 80k to 180k but we have said the retiring partners do not need the capital so we could leave that as we do not need it.....question is what is the best way forward one of the other partners suggested I could divide my share between them all and they would give it back to my son once he became a partner....this set off alarms to me and I said I wasn’t keen on that,would becoming a sleeping partner be an option ....any ideas or suggestions would be gratefully received. Many thanks sooty forgot to say that I retire in 2.5years time

 

[WaveJumper]

Not sure why you are in a hurry to drop your share holding, bring your son into the business as planned, and keep hold of your shares until your ready to pass them onto to your son at a later date.

My next question would be what does your share holder agreement say about offering shares to another party ie should your partners shares been offered for sale to yourself first and not just “given” away as seems to be the case.

And my radar would go into hyper drive like yours when they suggested you could divide your shares up Between them and they would make your son a partner at a later date.

As an aside does your son want to go into the business

 

[Murgord]

Hi wavejumper thanks for your prompt reply I am not in a hurry to drop my shareholding in the business but the feedback i was getting from one of the other shareholders was that they wernt keen for me to have a shareholding when i am retired,in other words i would be allocated profits but not doing any work for them but i would not be taking a salary, this surely must be a relatively common occurence in family busineses, we do not have a shareholders agreement as such ,we have a partnership agreement but that is over 20 years old and does not cover this situation,my son does want to go into the business and will serve a 4 year apprenticeship which will take him to 20 years old, I really just want to protect my/his share of the business until he is made a partner, I would appreciate anyones advice and thoughts on this Many thanks

 

[Mr D]

Hi wavejumper thanks for your prompt reply I am not in a hurry to drop my shareholding in the business but the feedback i was getting from one of the other shareholders was that they wernt keen for me to have a shareholding when i am retired,in other words i would be allocated profits but not doing any work for them but i would not be taking a salary, this surely must be a relatively common occurence in family busineses, we do not have a shareholders agreement as such ,we have a partnership agreement but that is over 20 years old and does not cover this situation,my son does want to go into the business and will serve a 4 year apprenticeship which will take him to 20 years old, I really just want to protect my/his share of the business until he is made a partner, I would appreciate anyones advice and thoughts on this Many thanks

Ummm…. what does it matter to them if you have a shareholding when you are retired? You are not required to copy them. Hey they will have shareholding when retired too!

Is there a shareholder agreement that specifies what all partners must do and covers that?
If there isn't then realistically what input should they have on what you do with your share of the business?

Not as if you are employed by it.

 

[Murgord]

Ummm…. what does it matter to them if you have a shareholding when you are retired? You are not required to copy them. Hey they will have shareholding when retired too!

Is there a shareholder agreement that specifies what all partners must do and covers that?
If there isn't then realistically what input should they have on what you do with your share of the business?

Not as if you are employed by it.

No the 2 that are retiring first are splitting there shareholding between their 2 sons each when they retire so there would be 4 of them with 66.6% I have the other 33% but have agreed on principle that I would drop to 20% so they would all be the same at 20% eventually , it is just in the meantime that may cause friction when I retire but still have 20% shareholding... but I suppose that’s just the way it is!

 

[WaveJumper]

No the 2 that are retiring first are splitting there shareholding between their 2 sons each when they retire so there would be 4 of them with 66.6% I have the other 33% but have agreed on principle that I would drop to 20% so they would all be the same at 20% eventually , it is just in the meantime that may cause friction when I retire but still have 20% shareholding... but I suppose that’s just the way it is!

Well unless you have some agreement in place which dictates how shares should be dealt with ..........

If they so choose to dilute their share holding between themselves and their children so be it for them, I see absolutely no reason for you too give up 13% of your own shares, in short personally I think you would be mad to do so. If you want to retire at a later and still hold your shares we’ll again that’s your decision and really nothing they can do unless they wish to purchase them, but of course you will keep them handing them on to your son at the right time.

All this again hinges on what’s in your partnership agreement, PROPER legal advice should be sort before you do anything. Another thought springs to mind, have you taken advice on any tax implications this may throw up.

 

[Murgord]

Thanks for the replies what makes this a bit more complicated is that one of the other 33% partners is my brother who is handing his shares to his sons ( my nephews) but I get on well with them all

 

[Murgord]

Thanks for your input guys, I have now checked my lip partnership and I do indeed have a 33% shareholding but going forward I want to drop that to 20% so that all the boys eventually have 20% each, question is how do I value this additional 13% that I have initially I thought about just dividing it up between the rest of them and giving it away for nothing but now I am having second thoughts on this after one of them expected me just to give them it , all the partners have different levels of capital showing in the accounts in the business with mine standing at 280k and the rest varying from 40k to 200k ideally going forward all the boys should start on the same capital ...I am just unsure how we go about this, I would appreciate any ideas thoughts on this. Many thanks

 

[Scalloway]

There is some information on LLPs here.

https://www.informdirect.co.uk/officers/members-limited-liability-partnership-llp/

Additional members can be introduced later in the life of the LLP. Unless an LLP agreement has been adopted, this will require the unanimous consent of the existing members.

all the partners have different levels of capital showing in the accounts in the business with mine standing at 280k and the rest varying from 40k to 200k ideally going forward all the boys should start on the same capital

A partner's capital in any partnership is Capital Introduced plus Share of Profits less Drawings. So the amount of capital is not a fixed sum like a shareholding.

 

[Mark T Jones]

Thanks for the replies what makes this a bit more complicated is that one of the other 33% partners is my brother who is handing his shares to his sons ( my nephews) but I get on well with them all

Not relevant, this is a business arrangement and not to be confused with your personal advice

I’d take dedicated advice for tax purposes, however on the face of it I’d go with the above advice and hold god shares until you are ready to pass them on

On a separate note, it rally is very important for the incoming owners to get a professional shareholder agreement drawn up. You might will have got by with goodwill and founders’ ’ Enthusiasm, second generation are far less likely to do so.

 

[Murgord]

Thanks guys we all have a meeting with our accountant next week and will be drawing a new agreement up I just was not sur what would be a fair price for my extra 13%... this is the 3rd generation coming in now business has been going over 50 years so really want it to continue thanks

 

[Chris Ashdown]

You need your own professional advice and its not the accountant who should be giving it, you also need a shareholders agreement to be made now and not at some later date

Families have a large habit of falling out and 20 years olds do not tend to have the same attitude to family as old crinkly ones do,

To me its stupid to give your sons inheritance away because he is single whilst the others have two sons, which appears to be what you are doing

Dont do anything untill you have a signed shareholders agreement in place and fully thought through all the senario's that could happen

What pressures could a 20+ year old place on a 16year old person, they could easily run the business as they wish without him having any say as he knows nothing about either business or life, they will also no doubt be taking more from the company in payment terms

 

[Murgord]

That’s why I think I should be a sleeping partner just now until he’s old and mature enough to be a partner , the other sons range in age from 24 to 32 and are starting to run the business there selves but are concerned that I have 33% to pass onto my son ...that is why I would be happy to drop to 20% eventually so that all them would be the same reducing the chance of any friction due to uneven share% it’s just getting to the 20% that I am unsure about I don’t know how you place a value on that especially with us all having different capital amounts in the business, I can see the other guys concerns that I will be retired while they will be working but I will be accruing 33% profit onto my capital account each year! ... please feel free to comment or suggest things thanks

 

[Murgord]

I meant I will become a sleeping partner when I retire which is 2.5 years when my son will be coming up for 19 so perhaps be a sleeping partner for 4 or 5 years after I retire before passing it over, I thought I could be a sleeping partner and not draw a wage but accumulate capital. Would be grateful for anyone’s thoughts thanks

 

[WaveJumper]

I am not trying to be discourteous in any way with my response here, will your son really be up to speed with the business and able too compete internally with the other partners (we don’t know what type of business this is) whilst you’re the sleeping partner the other sons could run the company into the ground making your rather large investment worthless.

Loads of good advice above about seeking proper legal and accountant advice especially on the tax implications must be very difficult if this is a family business.

Have you thought of selling your share of the business out completely, retiring (semi) and setting your son up in his own company with a little help from you on the side?

 

[Murgord]

Hi guys the business is in the construction industry with 30 employees we have long term contracts secured going forward with some of the other sons already running some of the business with the older partners taking more of a backseat so the natural transgression has already started about 5 years ago and seems to be going well...this is the only hiccup I can see and just want it to be as smooth as possible, there should be no tax implications and I don’t think I would consider selling up all my share as it’s a good business I guess I just need to know if is fair to expect to be reimbursed for giving up my 13% I think I know the answer I just don’t know the value? Many thanks

 

[Chris Ashdown]

I dont understand why your so keen to act for the benifit of the others against your son, the other brothers each have the third split between them whilst you propose you son is going to be the odd one out.
If the older ones feel like changing occupations and leaving their shares to their children would you all split it again to be all equal

 

[NickGrogan]

As you have one son, your family gets less?

So if you'd had 4 children, then you'd expect each child to get 12.5% - 50% for your sons and 25% each for the other partners' children? Would the other partners give up their shares to make this happen?

Should have planned ahead.

 

[Mr D]

I dont understand why your so keen to act for the benifit of the others against your son, the other brothers each have the third split between them whilst you propose you son is going to be the odd one out.
If the older ones feel like changing occupations and leaving their shares to their children would you all split it again to be all equal

+1

 

[Murgord]

I suppose I just do not want to cause any friction with uneven shares I can see your point though but the others would go from 17 to 20% so they would all have 20% each eventually ... it has been a good profitable business allowing me to retire at 56 and I just think going forward it would be better for all the partners to be on the same% it has worked well for the last generation so hopefully it would with this lot ... what happens is some of the older boys will be in the office securing work and the others will be on the tools,so I could imagine if the one on the tools had a higher percentage it could cause a bit of animosity for the ones in the office who are essentially winning the tenders and work... I hope that makes sense it’s just the transition from 33 to 20% and what price we put on it that’s the stumbling block may thanks

 

[NickGrogan]

OK, what happens if you or another of the current partners have another child in the future, will everyone give up shares?

 

[Murgord]

I very much doubt that will happen I am the youngest at 53 my brother is 55 and the other partner is 62 the sons that are in and coming in have children that are very young so I suppose they will have the same problem in 16 years or so

 

[Chris Ashdown]

Each family has a third at present, thats fair so why do you want to make it uneven

You already considering the jobs are not equal, even thouth presumably they all started at the bottom

You still have not comentated about getting a shareholders agreement which would have sorted this years ago

 

[Alyson Dyer]

It’s a stupid idea don’t do it!!

 

[Murgord]

It’s a stupid idea don’t do it!!

I take all your points on board but still think it would cause huge animosity if the youngest partner had the biggest shareholding,on the shareholders agreement we were run as a partnership for years and 2 years ago became a limited liability partnership and in this it clearly states I have a 33% share of the profits and it is this going forward that will cause the animosity I feel, so I think if I sold my 13% to the remaining ones everyone would be starting on a level playing field

 

[Murgord]

Just to add 2 years ago I was hoping my other son would have came into the business but he has just graduated with a masters degree and has landed a great job with a great salary so is not interested in the business at all and I spoke to him at great length about the business but it was just not for him I think that is one of the reasons I have the 33% because I was always hoping he’d come in and it would be a 6 way split!

 

[Alyson Dyer]

If I was your son I would be pretty hacked off in a few years time when the brothers are ganging up on him and getting their own way because any clout he might have had his dad gave away!!

 

[Murgord]

There is one lot of brothers on his side(cousins) and one lot on the other side so I think if there was any (ganging up) he would be with his cousins side giving them3 votes to 2

 

[Alyson Dyer]

There is one lot of brothers on his side(cousins) and one lot on the other side so I think if there was any (ganging up) he would be with his cousins side giving them3 votes to 2[/QUOTE

Nope, one set of brothers on one side, other set of brothers on another side and your son on his side. Like a triangle

 

[Murgord]

then would he not have the casting vote... lol

 

[Alyson Dyer]

then would he not have the casting vote... lol

Exactly!!!!!!!!

 

[Mr D]

There is one lot of brothers on his side(cousins) and one lot on the other side so I think if there was any (ganging up) he would be with his cousins side giving them3 votes to 2

Don't bet on business decisions being taken based on familial lines. Its a bad way of working.
The forums are littered with companies in trouble where family members have stopped speaking to each other / disagree with each other / want to split from each other.

 

[Murgord]

Well if he had the casting vote HE could decide which side to go with , I do realise that business and family do not always mix well but it has lasted the last 50 years on even shareholding so it would seem like we would be upsetting the applecart having different shareholding

 

[Newchodge]

What if you have another child? What if your second son changes his mind? What if one of the others has another child? Or one of the current children decides they don't want any part of the business except their shares and dividends? You seem to be basing your entire strategy on an assumption that it is a family business and everythiong should be done as if it were a real family. I agree with others. You have 33.3% of the shares. The shares are yours to do with as you will. Keep them until your 16 year old starts to play a full role in the business, then decide what to do with them, in consultation (if you wish) with your children.

 

[Mr D]

So what happens if this next generation, one person cannot or chooses not to have kids. Would they then have to sell / give their shareholding away when they reach retirement?
What happens if each shareholder has one child except one who has 4. Do the shares get split around between the various shareholders then to match up?

What if your son decides to bring his life partner / wife / husband into the business? Split his shares again or all give part of their shares?

 

[Mark T Jones]

Sorry to be a meg-head here, but the ‘third generation effect’ is very pronounced in family business - meaning that the risk of a business falling apart in third generation ownership is very high.

It really is important to separate the family from the business at this point, and to make all decisions with your business head on.

 

[Murgord]

thanks for all you input guys its given me a lot to think about ..we will see what happens at the meeting next week but you have given me some good advice

 

[NickGrogan]

Just to add 2 years ago I was hoping my other son would have came into the business

You have another son, and you're not giving him any shares, but you want to give the shares to the sons of the other family members?

So he'll be the only child in his generation to not get any shares???

Being a shareholder is not the same as being a director or an employee.

Give both your son's equal shares, as everyone else has.

Your son's education and experience with another business could make him very useful to the business.

 

[Mr D]

You have another son, and you're not giving him any shares, but you want to give the shares to the sons of the other family members?

So he'll be the only child in his generation to not get any shares???

Being a shareholder is not the same as being a director or an employee.

Give both your son's equal shares, as everyone else has.

Your son's education and experience with another business could make him very useful to the business.

And who knows, in 10 year time he may want to join the business.

One of my suppliers is a multi generation business, 3rd or 4th generation now.
I have known two of the partners over the years, both joined after working for some years elsewhere. They brought new skills, new perspective to the business in their late 30s. One of them in his 20s would have been useless, now he has the skills and experience to increase their sales.

 

[Murgord]

He won’t be the only child in his generation not to have shares my brother has a daughter not in the business and the other senior partner has a son who is not in the business but has his own and also has a daughter who works in the office but none of the above have any shareholding in the business