The Importance of Partnership Agreements
Writing a business partnership agreement will help you and your partner carefully detail the terms of your business relationship. Whether you are part of a limited partnership or a limited liability partnership, it is important to take the time to write your partnership agreement carefully. Forming a business is exciting, and it can be challenging to consider what could happen in the future. Nonetheless, Partners often become involved in disputes related to their roles and responsibilities, ownership division, and division of assets should the partnership terminate in the future. Taking the time to create a partnership agreement will help you avoid conflict with your partner or partners.
Avoid Conflict With Your Business Partner
You may be wary of discussing difficult subjects with your business partner, such as your partnership’s dissolution or how to resolve disagreements. However, one of the key benefits of creating a partnership agreement is to address potential conflict. It’s always better to come to terms with difficult issues before they happen, then to strain to resolve them in the future. For example, when you and your partner can agree on your ownership shares upfront and how to sell the partnership, you will both enjoy more peace of mind if you decide to do so.
Resolve Some of the Most Important Issues Up Front
Creating a partnership agreement also allows you to resolve some of the most commonly disputed aspects of owning a business together up front. Your partnership agreement should include all of the following types of provisions:
- The name of your partnership and details related to each partner and his or her designation
- Include the primary purpose of your partnership business, including any restrictions on business activities.
- Your partnership agreement should also address who will manage your partnership. Will both of you equally manage the business? The agreement should spelled out in clear terms the responsibilities and roles of each partner regarding the business’s day-to-day activities.
- Your partnership agreement should spell out your profit distribution, meaning which partners will receive which percentages of the profits. In some partnerships, both partners receive 50% of the profits. However, and other partnerships, one partner may receive more profits and be required to do more work for the partnership.
- Your partnership agreement should also discuss capital contributions. For example, if you contribute a significant amount of money to the partnership, you may expect a larger share of the ownership or profits. Whatever you decide, it is important to record each partner’s ownership percentages and capital contributions to avoid disputes in the future.
- Your partnership agreement should address taxation and financial reporting.who is responsible for preparing and maintaining your accounting? Who is responsible for filing tax returns and managing any audits that could occur in the future? Working out these details will help your business function smoothly and avoid costly tax problems in the future.
- The partnership agreement should also cover the possible future termination of the partnership. What terms would you and your partner like to agree to should you decide to sell the partnership, or should one of you choose to leave? Ensure you state how the partnership will be terminated and how you will divide the partnership’s interests and assets between yourselves.
Resolve Disputes More Effectively
Every partnership agreement should include language regarding how you will resolve disputes. When you do not have a formal partnership agreement and a serious dispute arises, you may be wondering how you will effectively resolve the issue. Some partnership agreements require partners to bring their dispute before an arbiter, in an effort to settle the dispute outside the court of law. Your partnership agreement should address each party’s responsibility when it comes to disputes. Will all partners be responsible for handling the dispute? Who will pay for the dispute? Will you agree to go through the process of binding arbitration? Or would you like to use a less formal process, such as mediation? Some partners opt to avoid alternative dispute resolution altogether.
Protect Your Benefits
Many benefits come with establishing a limited liability partnership or a limited partnership. Creating a partnership agreement can help you protect all of these benefits. When you create a partnership agreement, you can protect your tax benefits, ensure that your partner’s and your employees maintain confidentiality, if necessary. Without the protection of a correctly drafted partnership agreement, your benefits could become jeopardized by minor conflicts and disputes that you could have otherwise avoided if you had a written partnership agreement.
It is in Writing
Many of our clients have thought that verbal agreements were sufficient, especially when they trust their partner. Perhaps their partner is a spouse, family member, or friend that they trust inherently. While it is important that partners trust each other, it is even more important to get your partnership agreement in writing. No matter how great your relationship is with your partner, it is a guarantee that some type of conflict will arise down the road. Without a written partnership agreement, even mild disputes can cost money and require a significant amount of time.
Most small business owners are trying hard to keep their businesses profitable, and they may not have the capital on hand to deal with an expensive lawsuit. Entering into a formal written agreement that your lawyer reviews will help you ensure that you manage your partnership correctly and that your partnership is set up correctly from the start. You will also be able to avoid conflict down the road by spelling out how you and your partner will resolve disagreements ahead of time.
Contact an Experienced Business Lawyer Today
If you are planning on forming a partnership, or you have already formed a partnership but need assistance writing a formal agreement, our lawyers are here to help. Contact us today to schedule an initial consultation and learn how we can help you protect yourself and your business.