A partnership is a type of business structure that is formed with two or more people. Each member contributes assets to the business and has a share in the profits and losses that the business incurs. Some partners will be active participants in the operations of the business, while others might play a more passive role. But before your business gets going, one of the most important steps is drafting and executing your partnership agreement. A partnership that begins without or with an improperly drafted agreement can face major disagreements if something goes wrong.
The partnership agreement sets out all the terms and conditions agreed to by the partners. In this document, every possible incident is included, from those you can expect to those you might not. Below we discuss some things you can’t afford to forget to include to avoid conflict down the road.
- Contributions, ownership, and distribution
As we mentioned above, each partner contributes assets to the business. Upon contribution, the partner should know what their role in the partnership is going to be. In the partnership agreement, you’ll need to make sure that each partner’s stake in the formation and finances of the business is completely clear. From detailing how much each partner needs to contribute to get the business up and running, to what their responsibilities will then be.
Other things to include in relation to contribution and distribution are things like how the partners will split profits and losses and how much each partner will be paid and when. Another important thing to include is whether each partnership will be paid a salary and, if so, how much. Further, the agreement should also detail if something changes with regard to ownership of the business, such as a partner leaving unexpectedly, which we’ll touch on in more detail below.
- Unexpected Changes
Sometimes, unexpected things happen that might necessitate changes within your partnership. This could be anything from a partner getting sick or dying, a partner wanting to retire, or to entering into buyout negotiations and it suddenly becomes necessary to evaluate your business from a sales perspective. To make sure that you account for as much as possible, it’s also a good idea to list out circumstances under which you are allowed to modify your partnership agreement, as well as the process necessary to make that change.
- Dispute Resolution
An important hurdle to get past when drafting your partnership agreement is to realize and understand that there will come a time when not everyone agrees on everything. In these situations, it would be very helpful to have a conflict resolution process set in place in your agreement where the rules and procedure are clearly defined. This could include concerns regarding who gets the last say and what types of decisions require a unanimous vote by all partners versus what decisions can be made by a single partner. By having a solid decision-making process in place that everyone agrees upon and is willing to adhere to, you avoid the risk of problems down the road.
Dissolution is the process by which a partnership takes to legally come to an end. Within your agreement, there should be a step-by-step guide on what will happen in the event that you and your partners decide to dissolve. Sometimes this happens if you and your partners cant agree on where your partnership is headed or if one or more of you just wants out. It’s also important to note that states also have their own requirements when it comes to dissolution, so doing some research and including those requirements as well will make the process that much less stressful.
Contact and experienced business law attorney.
As you no doubt have realized, there are so many things that you have to think about when starting a business partnership. From selecting people you can trust to making sure you have all of your legal bases covered, you will want to make sure that you speak with an experienced business law attorney who can help you along the way. By having a business law attorney draft a detailed agreement, you won’t have to worry about gray areas or leaving things out that can lead to nasty disagreements and possibly even to a courtroom battle.
Jack R. Sturgill has over 40 years’ experience working directly with clients to make sure they get the help that they deserve. If you are starting a partnership and need help drafting your partnership agreement, please don’t hesitate to call us at (410) 296-6485 today!