I am entering into a partnership agreement with a co-investor to run a small/medium-sized food business and am trying to protect myself from possible future problems. One of my concerns is to protect the business from creditors he might acquire on the side that I might not know about. For example, if he opens another business and loses money, I don't want anyone to come and take over his share of the company.

I know there is a contract clause called the Right of First Refusal, which allows me to buy his share before anyone else can. But I was wondering if I can also prevent other people from coming and trying to take over his share or demand money from our business.

By the way, I am entering the agreement as a corporation, and he is entering as a private person.

1) Investor is not a partner.
2) Do not enter in partnership

If you insist on doing a deal where your investor has any operational control what so ever, you should spend money on a competent attorney. Just pay him for 3-4 hours of his time and learn what could happen. Or you can just do (1) and (2)

This really depends on the state's specific business law.

In my jurisdiction, I'd tell you to set up a two member manager-managed LLC with articles of organization stating that his membership equity interest is 33%, and his share of the profits is 33%. Then sign an operating agreement affirming that you're the sole manager.

There. You've just separated management from ownership. His creditors can squeeze him for cash, but even if they seize his equity interest in the company, that interest wouldn't include any decisionmaking power because his membership interest doesn't include a management interest, and he doesn't have enough equity to change that.

In a partnership, that's not true, because there's no distinction between ownership and management. If you own a partnership interest, you have a right to make decisions.

You could also do this with a corporation or a limited partnership or a business trust, or about a thousand other ways. Talk to a lawyer.

(This is general advice, and I live in a funky state when it comes to law, so it might not apply to you. I am not your lawyer. This is not legal advice. My dog's breath is awful today. I don't want to know what she's been eating.)

Knocks said:I don't want him to have any operational control as he has no experience in this business whatsoever. He is investing 33% and wants 33% of the profits, and I am OK with that. My friend and I will make all business decisions and own the other two thirds. What is the best type of written agreement that will protect our interests in this type of arrangement? By the way, we will get a lawyer but I want to learn as much as possible prior to starting to spend money on legal fees.So there are 3 of you involved, right? If you are only worried about this investor, you should be able to structure his contribution as a loan, with monthly loan payments being based on net profits rather than a fixed amount.

I'd be more worried about having a friend as a partner. That will be the source of any future issues, no matter how smooth you think the partnership will operate.

Out of pure speculation, what if he goes to Atlantic City and blows all his money, including his interest in the business, and we don't have enough cash to exercise our right of first refusal? Basically, we don't want some random a-holes coming by to say "hello, we're your new partners" or "you owe us money."

Glitch99: the friend co-owns the corporation with me and we've been working together for 10 years. We are expanding now, hence the need for a third guy.

EvilCapitalist: I do understand the difference. We haven't established that we're going with an LLC yet.

oopsz: Can the right of first refusal be exercised partially? For example, if he decides to sell his interest, which is worth 100K, and we only have 50K at that moment, does it allow us to purchase one sixth of the interest (i.e. half of 33%) and for the new member to take the remaining sixth?

I have been reading about the LLC option for the past day. It does add quite a bit of overhead in registration fees and paperwork, on top of our existing corporation. One thing I am trying to find out is whether we would need to re-obtain all the food-related licenses (liquor, etc), since the new business would technically be owned by the LLC, and the corporation would merely be a managing member.

I am also wondering if we could sell the new guy non-voting stock in our corporation. That would close the road for him to trying to manage the business and he would get his 33% as dividends (or salary, depending on how the taxes work out).