Legal Question in Business Law in California

Buy-in to Business

Scenario: I rent space as an independent contractor in a business. I'm considering a partnership in that business. If I want a stake in the company, I'm being asked to ''buy-in'' to this business.

The owner took out a $50, 000.00 loan for T.I's. (sign, built-in partitions, furniture, etc) Other than the structural T.I's and furniture/decor, there is no ''real'' property. The space is leased. Services are provided to clients, but my services are in a different area of expertise than the current owner. We each would continue to keep our own revenue from those services.

My question is this: The business has been open 2 years. (each of us have more years than that working in business but THIS business is 2 years old) It still has this debt.

Would it be customary for me to buy into that loan? Say the loan is $50K: I become a 30% partner. Is the appropriate ''buy in'' for me $15K since that's the amount of loan she took out for T.I's?

And I understand that after all P&L is calculated for each month I would receive 30% of what's left. What about loss? Am I correct in assuming that whatever we were to be in the red would be 30% my responsibility at that point?


Asked on 7/02/08, 12:00 am

3 Answers from Attorneys
Cathy Cowin Law Offices of Cathy Cowin

Re: Buy-in to Business

All great questions! All negotiation points. I am in your area and have experience in business law. I would suggest you consult with both an attorney and an accountant to discuss your plans. You don't mention what type of business, but indicate a partnership. For instance, would it be better to create a new LLC if you have concerns about the company's debts? Have you examined the books? One approach might be to determine what you are comfortable doing and come up with a "deal point letter" as an offer for the business. Also, if your business and the other person do different things and you simply rent space, is this really a good deal?

What are the expected cash flows? Your agreement should anticipate what happens if you get down the road and want out. Not only look at the entrance strategy, but also the exist stategy issues.

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Answered on 7/02/08, 3:21 pm
Bryan Whipple Bryan R. R. Whipple, Attorney at Law

Re: Buy-in to Business

The buy-in scenario is not out of line, but as with most business deals, "the law" does not compel a particular formula; it's whatever a party's negotiating skill is able to achieve. Also, in partnerships, absent an express agreement, losses are shared the same way as profits. Here again, the parties are free to negotiate different terms. Partnership law only dictates the default provisions if and when the partners didn't make a non-standard agreement.

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Answered on 7/02/08, 12:53 am
Jonas Grant Law Office of Jonas M. Grant, A.P.C.

Re: Buy-in to Business

Mr. Whipple is correct - technically speaking, your questions are business, not legal, ones. And in general, you should not get involved with a general partnership - you should form an entity instead (C corp., S. corp, LLC).

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Answered on 7/02/08, 5:39 am


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