Do We Need a Partnership Agreement for our Business?
A Partnership Agreement can address all areas of how your business will be run
You and your best friend have decided to start a business together. You’ve both done your research and your ready to turn your plan into action. But before you open your doors for business, consider the benefits of a partnership agreement.
At the beginning, many business partners are excited for this new opportunity and they generally agree on most decisions. Most partners believe they will continue along this smooth path forever. They assume nothing will go wrong or any disagreement will be resolved quickly and easily. Sometimes business partners trust each other so much they never develop a written partnership agreement. However, a lot can go wrong, and something will go wrong at some point. Even if you’re lucky enough to always be on the same page with a business partner, there may come a day where one partner wishes to retire early on friendly terms. A partnership agreement can help you through both the good and the bad times of a partnership, as well as prevent some ugly and complicated situations. This post discusses several important reasons for why your business should have a written partnership agreement.
What is a Partnership Agreement?
A partnership agreement is a written document describing how partners are going to run their business.
What happens if my business doesn’t have a Partnership Agreement?
Businesses without a written partnership agreement are operating under the general partnership laws of the state in which they were formed. Although these laws have evolved over time to protect the parties’ interests, state laws are not comprehensive enough to cover every scenario your specific business will face. Additionally, without a written partnership agreement you may be subjecting yourself to certain liabilities. Some states do not require every partner be listed on the partnership with the Secretary of State. This means, without a written partnership agreement, it may be harder to prove some partners were operating under limited liability.
“This means without a Partnership Agreement, you may be subjecting yourself to certain liabilities.”
When should you get a Partnership Agreement?
It’s best for partners to enter into a written partnership agreement as soon as the business has been formed and before the partners have started operating the business. This way, all partners are on the same page from day one. The longer a partnership operates without a partnership agreement, the more likely partners will have differing opinions on how to run the business.
What scenarios can a Partnership Agreement address?
· Control and Decision Making. A partnership agreement can establish which areas of the business each partner will manage. If one partner has a background in finance, it may be best to give them control over the day to day financial decisions. A partnership agreement can also determine which decisions need approval from all members. For example, maybe one partner manages the business payroll and employee benefits, but the partners agree to make hiring decisions together. Additionally, partners can set spending limits for the business, such as requiring all partners to approve of a purchase over $500.
· Dispute Resolution. A partnership agreement is very important in determining the process to follow in the event of a partner dispute. Without a partnership agreement, disputes tend be costly and lengthy to resolve. With a partnership agreement, every party has already agreed to a specific dispute resolution process.
· Process for Accepting a New Partner. After a couple years, one partner may want to add a new business partner. A partnership agreement can describe the method for voting on new partners as well as required qualifications for the potential partner.
· Leaving the Partnership. A partnership agreement can establish the buy-out process in the event one partner wishes to leave the partnership. There are many reasons a partner may want to leave the business and not all of them imply a negative situation. For example, one partner may wish to retire earlier than originally planned. The partnership agreement can establish the terms for a buy-out.
Real Life Consequences
It’s possible and common for business partners to have a falling out. Without a written partnership agreement, all the parties have differing opinions on what steps to take during a dispute. For example, one partner may want to leave the business completely, however, neither party can agree on a buy-out price. This will likely lead to both parties hiring their own business lawyer to negotiate the buy-out price. The time, attorney’s fees and the headaches can all be avoided by having a thorough partnership agreement before a dispute arises.
If you are interested in learning more about partnership agreements, give us a call at 720-999-5517. We’re happy to help.