Myself and two friends went into business together as Event Planners. We got our first job and decided to invest the money that we were paid into the business. One of the partners went against one of the rules that we set forth at the beginning so we told her that we can no longer work with her and she agreed that it was the right decision and we parted ways. She later called and asked for a portion of the money that we invested in the business. Is she entitled to any money?
The short answer is yes, she probably is entitled to some money. Partners are not employees; they are joint owners of the company. Therefore, when a partner leaves a partnership, she has a right to expect some reimbursement for the loss of her ownership interest. This is often called a “buy-out,” where the remaining partners buy the exiting partner’s share of the business. How much you would pay an exiting partner for this ownership interest depends upon a few factors. Most importantly, if you have a Partnership Agreement that addresses this, it will usually apply. If not, the three of you would have to negotiate what is a fair buy-out. It may be based on the initial investment or the current value of the business. Consulting a business attorney can help you to negotiate a fair buy-out amount and perhaps help you amend your Partnership Agreement to clarify the process of removing a partner.