Think Your Business Partner Sucks? Wait 'Til You Meet Their Family!

Welcome to Your Business, Accelerated! Digitally remastered with AI, Your Business, Accelerated! is the go-to podcast for entrepreneurs ready to scale smart. Hosted by Attorney Shaune B. Arnold, it delivers strategic business insights, legal frameworks, and real-world solutions to help you operate with clarity and confidence. Get actionable guidance to protect, grow, and optimize your business…one smart move at a time.

What happens when your partner’s death—or divorce—hands you their spouse or kids as co-owners? In this eye-opening episode, Attorney Shaune B. Arnold reveals how to protect your business from unintended family entanglements through smart estate planning, airtight agreements, and bold boundary setting. Save your legacy before drama walks in. 

Transcript

Hello, everyone. I want to welcome you this week and every week to your business accelerated. I am your host, attorney, Shaune B, Arnold, I am excited, as I always am, to be here with you today.

So, today, we're looking at your business partner once again. Here's a question that I have for you. Do you think your business partner sucks? Well, just wait until you meet their relatives.

Okay, so you're asking yourself, what do I mean by that? Well, I bet you didn't know when you got involved with your business partner, you might wind up with their relatives as your business partners.

Well, before we dig right on into today's subject matter, I want to go through a few housekeeping matters. First of all, here on your business accelerated, we are dealing with those hardcore legal and business issues that you are going to run into as an entrepreneur and so as a business attorney, which I am, I want to be sure you understand that I am a California business attorney.

So, when we talk about issues like we're doing tonight, and how those issues affect your business, you have to take these legal issues in the context of my being a California business attorney. If you live in another state, or you live in another country, or you live in another state of mind, then I want you to take what I tell you to an attorney in your jurisdiction, just to make sure that there's no difference between the law where I live and the law where you live.

I also want to invite you to listen to my other podcast, LegalBiz café. On legal biz cafe, we deal with those mindset issues, the mindset issues that make you just want to crawl under a rock and that stop you from starting building or fixing a business that you absolutely love. When you listen to LegalBiz Café AND Your Business Accelerated, you are putting yourself in position to win. You will build a great business while you build your competence and your confidence.

Now, let's get down to brass tacks. Today, we are discussing winding up with your business partner’s relatives. How in the world could that possibly happen? Well, it could happen if you don't take care of where the business interests go if your partner dies.

You know, there was a time when this was not even an issue, because until 1975 in the United States, the husband had exclusive management and control rights over marital property, and that would include property that the woman owned separately, that she brought into the marriage. He would get management and control rights over it.

Finally, in 1975 the Supreme Court struck that nonsense down, and now partners in a marriage have equal management and control rights over marital property.

Now, here's something that's really significant. Sometimes, people will come into a marriage with property that they already owned that's separate property, and while they're married, someone wills property just to them and not to their spouse. That is also separate property.

However, things can get a little muddled when spouses start co-mingling funds, when one spouse lives in another spouse's house and they start making improvements to the house, or when spouses work in a business together, and one owned the business before they got married, the other one comes in after marriage and starts putting money into the business and spending time in the business, building the business, things can get a little bit weird, and so you'll wind up with a spouse having rights over business interests.

You may even wind up with children having interests over business interests. Now, how in the heck could that happen when your children don't have management and control rights? But you know what they do have? They have the right to inherit. If you have business interests and you die, those business interests have to go somewhere. 

They don't just stay at the business. Your estate actually gets control of your business interests, and they will then pass in the way that your estate plan designates that they're going to pass. You need to determine if you want your spouse or children to run the business in your place. Will they get voting rights? Will they only get the economic interest (money) and no voting rights or power to act in the business? To be indelicate, you need to make this determination before you die.

Let me tell you what happened to me and to a client of mine many years ago, I had a boss that actually died, and I was his only legal associate. He was the partner, and I was the associate. Now, here's the challenge.

It created a special problem, because there were no other attorneys in the firm, and his family thought erroneously that they were going to be able to just step in and start hiring lawyers and maintain that law firm after he died. But non-lawyers cannot legally run a California law firm because they aren’t lawyers. They can’t hire lawyers and pay lawyers. So, they did not have the legal right to come in and bring their cousin in and try to put him in the partner position over me and try to run that law firm around me. It just didn't work. The entire law firm fell apart.

Other businesses have sensitivities too, not so much created by the law like was created in that situation where my boss died and there was nobody, none of his kids were attorneys, and his, although his nephew was an attorney, he didn't work for the law firm and the people that wanted him to come in didn't have the right to hire him. That was a very special problem that was created by the law but there are other scenarios where a business partner dies and something has to happen with that business interest.

Usually, if you're talking about a partnership, then, unless that partnership document really defines what's going to happen to that partnership interest, chances are it's just going to pass to the spouse or the children of that person that died. Check the partnership agreement to determine how partnership interests will pass. If we're talking about a company that has a corporate structure, for example, an LLC, that company would have an operating agreement. A corporation would have bylaws. 

You want to look at the bylaws or the operating agreement to find out what that document says happens when somebody dies. You may wind up with the person's spouse or children getting their interest, but it might be a non-voting interest. If you are a business owner, take a look at the organizational documents of that business and determine whether that document comports with how you want your estate plan run, if you do want your spouse to run your interest inthe business, then you need to either create a site agreement or get that language put into the organizational documents. When it comes right down to it, only what's written will matter, so make sure that you check those documents.

Here's another scenario. What happens if somebody didn't die? What happens if there is a divorce instead? We talked a bit ago about community property and separate property. Separate property is that property that you own before you get married, or that you alone inherit during your marriage, or that you purchase during your marriage with money that was your separate property.

There are certain ways that you can get and maintain separate property, but if you are in a community property state, you need to be extremely clear about your property rights. If you are a business owner in a community property state, you need to be very clear with your spouse and your business partners on what happens to your business interests, whether those are separate property or community property, and if your spouse actually joined your business, then you need to look at whether they're actually putting anything into the business, whether they are making improvements in your business, whether they are spending time building up the goodwill of your business.

Because if they are and you get a divorce, they are going to be entitled to get that money back, …all of the money back, especially if you're going to get to keep the business and the goodwill that has been built up in that business.

So, if you have a separate business, be very careful about when you are commingling funds. If you have a community business, which is a business that you and your spouse started together, then chances are, if you're in a community property state, and if there is a divorce, you and the spouse are going to split that business right down the middle. That's when it sometimes becomes cheaper to keeper, as they say.

I also want you to think in terms of retirement benefits if there's a divorce, not only if you are a business owner, but also if you are an employee, because if you are an employee and you live in a community property state, then your spouse is entitled to one half of your earnings during the time that you were married, so they will be entitled to half of your retirement benefits that are applicable to that period in which you were married. If you were married for five years and you worked for a particular company for 20 years, then your spouse will be entitled to half of your retirement benefits for that five year period in which you were married. That's why people decide to just live separate lives in the same household. It does happen.

Folks, these are the tips that I want you to be aware of as you are building your business interests and your family.

Ladies and gentlemen, I want to thank you for joining me today on this week’s episode of Your Business, Accelerated! I’m attorney Shaune B. Arnold. I invite you to follow me on Facebook, LinkedIn and Twitter X. In all of those places, my moniker is S.H.A.U.N.E dot Arnold.

In the meantime, and in between time, I am, …as always, reminding you to MAXIMIZE your COMPETENCE to get the CONFIDENCE YOU NEED to succeed.

I’ll see you right back here next week, on Your Business, Accelerated! …Bye-bye, friends.