Despite the area of business or the type of legal entity, a multi-owner business definitely needs to have a partnership agreement in place. Each partner comes to the business venture with different expectations and goals, and through the process of preparing the partnership agreement these aspects will come to light.
In a way, business partners are getting married.
But what about a husband-and-wife business? Do married couples need a partnership agreement? Presumably they already know each other and what each other wants out of the business, but is it really that simple? This is actually a very common question and one that is more nuanced than you might think. The answer can depend on a number of factors including the state you live in and the equity division.
In Florida, there’s a special type of asset ownership available to spouses called “tenants by the entirety” (TBE). When a married couple owns an asset as tenants by the entirety, neither Spouse A nor Spouse B owns the asset. Instead, the couple as a collective unit owns the asset.
Unlike most other states, Florida allow all types of assets—real and personal, tangible and intangible—to be held as tenants by the entireties. So, if Jim and Pam own a business as tenants by the entirety, “Jim-and-Pam” as a married pair own 100% of the asset, but neither Jim nor Pam individually owns a separate portion of the asset. There is, in effect, only one owner.
The benefits here are that if one spouse gets sued, creditors can’t go after the business assets that are owned as tenants by the entirety. Also, if a spouse passes away, the ownership of the business transfers directly to the surviving spouse without having to go through probate.
When a business is owned as tenants by the entirety, the husband and wife do not need a partnership agreement because there are not multiple owners of the asset. Do keep in mind that we are only talking about cases in which the husband and wife pair are the only equity owners of the business. If a sibling, child, or unrelated third party also owns the business, the calculus changes.
Just because a partnership agreement isn't truly necessary in this situation, doesn't mean it wouldn't be a good idea. Partnership agreements address a myriad of key issues, not just succession planning.
Ownership as tenants by the entirety is not the default for married couples, so be sure you talk to a qualified attorney to get the business filings done correctly. Paperwork errors can create a situation where you inadvertently opt for a similar but different form of asset ownership.
Moreover, Florida law places six additional restrictions on owning an asset as TBE. Estate planning attorneys call these the “six unities.” Three of the most important for husband-and-wife-owned businesses are:
If you get married after you start a business and still want to own the asset with your spouse as tenants by the entirety, don't worry. There are ways to transfer ownership, but you should contact a business attorney to ensure the process is smooth and done right.
In terms of our original question, situations in which a husband and a wife each own a portion of the equity are simpler, relatively speaking. As a rule of thumb, if multiple people have equity stakes in a business, there should be a partnership agreement in place. This agreement should address a wide array of issues from equity division and owner compensation, to owner exits and succession planning.
Unfortunately, husbands and wives often assume that, because they’re married, they don’t need a partnership agreement. In my experience, all the problems that can plague non-married business partners can equally plague married business partners. In fact, I would suggest that the situation could become even more dire should the marital side of things go pear-shaped.
A couple years ago, a family law colleague of mine told me an interesting story about one of his clients. Prior to needing the services of my friend, the husband and wife were in business together, both owned and worked in the business. With predictable marital hubris, they hadn’t implemented a partnership agreement because their marriage was perfect, not like other marriages.
They knew the business would depend heavily on government contracts, and they knew that a Women Business Enterprise Certification (WBE) would help them in this arena. Obtaining the certification meant complying with the program’s various requirements, such as:
All was well and good until statistics came calling and their marriage fell apart.
The wife used her position as the majority equity holder and controlling member of the board to clean house. She removed her now ex-husband from the board and fired him from the business. Worse still, although he was no longer employed by the business and wouldn’t be receiving a salary, he retained his ownership interest in the company, which was taxed as an S corp. and would issue him a Schedule K-1 statement. Without a salary from employment, he would have to dip into his own pocket to pay those taxes.
Even though the need to maintain the WBE certification would have restricted what a partnership agreement could and couldn't have done in this case, a fulsome discussion with a business attorney could have put in place mechanisms that allowed for a less contentious business "divorce."
Another common situation is where a business is fully owned by one spouse. This situation can also have the added wrinkle of the other spouse working in the business without being an actual equity holder. These situations also require a partnership agreement with a buy-sell provision to address issues of ownership transfer primarily in cases of owner incapacitation, disability, or death.
This is an especially thorny area if the other spouse is forbidden from taking over ownership of the business (e.g. only lawyers can own law firms) or if the business is in a highly technical or specialized field (e.g. large-scale data modeling or mechanical parts fabrication).
First, should something befall the spouse who owns and runs the business, the surviving spouse would not automatically become the owner of the business. Spouse A owned 100% of the equity meaning that the couple did not own the business as tenants by the entirety, so there is no presumption of unity of survivorship. In order to take over ownership, Spouse B would have to go through the courts.
Second, if Spouse B didn’t work in the business—or perhaps even if they did—the chances are good that they would have no idea how to run the day-to-day operations or perform the technical side of the business.
A situation like this happened to a recent client. Her husband owned and ran a profitable IT and data company. He was the sole equity owner and had a large role in the day-to-day operation and management of the business. Then, he died.
When he died, he hadn’t put any succession plan in place for his company nor was there a written buy-sell agreement to handle the ownership arrangements. This left his wife, who had no role in the company nor the necessary technical skills to operate the business, in a very tough spot. She couldn’t immediately assume ownership of the company from her deceased husband, which meant she couldn’t put someone in charge to keep the operations of the company on track. But without assuming ownership she also couldn’t sell the company. It was a horrible Catch-22 that could’ve been warded off with a buy-sell agreement.
As you can see, multiple factors determine a married couple’s need to have a partnership agreement for their business. If they live here in Florida and have properly set up the company such that the assets are owned by the couple as tenants by the entirety, then a partnership agreement isn’t necessary. The couple may still want to have a partnership agreement in place, though, to address other issues.
On the other hand, if each spouse owns a portion of the equity (or shares, stock, membership interest units—whatever term applies to your situation) then, yes, you need a partnership agreement. The agreement is intended to protect not only both spouses but also the value of the business.
