Conflicts are inevitable in any relationship. Whose day is it to take out the trash? Who moved my stapler? Why did you purchase another jar of peanut butter, we already have two?! Whether it’s a marriage, work relationship, or the sandbox during recess, misunderstandings happen. As we have all witnessed, minor misunderstandings can balloon into full-blown conflicts. The worse conflicts are those that lead to dreadful lawsuits.
As it relates to your business partnership, a well-drafted partnership agreement not only outlines your rights and obligations, it also outlines how to settle conflicts that may arise from time-to-time. Additionally, partnership agreements address anticipated “change” such as succession, growth, retirement, and dissolution. Essentially, these agreements help you plan ahead for the good times and bad times.
The Benefits – What a Partnership Agreement Can Do for Your Business
Unless you have a partnership agreement in-place that spells out your rights and responsibilities, your respective state law will apply and dictate major partnership affairs. Most states have adopted a version of the Uniform Partnership Act (or Revised Uniform Partnership Act). Essentially, this Act enforces a “one-shoe-fits-all” set of default rules that apply when a written partnership agreement does not exist or an existing agreement does not speak to a certain matter of contention. The default rules generally assume that partners have invested an equal amount of time and resources into the business. Therefore, under state law, profits and losses will be split equally in the event of a partnership breakup. However, we all know that in some cases partners may have intended a different arrangement when the partnership began; especially if there was a silent partner who invested the capital while another partner handled the day-to-day work.
In reality, no two businesses or partnerships are alike. State rules may not be as accommodating to your unique partnership arrangement or business operation. The major benefit of having a written agreement is that it allows your business’ fate (present and future fate) to be in your and your partner’s hands. Specifically, written partnership agreements afford you and your partner an opportunity to formally address authority, management and control of the business, capital contributions, profit and loss allocations, future distributions, and so much more. Moreover, in times of disputes and separation, a clear understanding and settlement can be easily struck.
The Terms – The Key Provisions Your Partnership Agreement Should Include
Your partnership agreement should speak to your unique business relationship and business operation. Again, no two businesses are alike. However, there are at least 8 key provisions that every partnership agreement should include:
1. Your Partnership’s Name
One of the first tasks you and your partners will check off your to-do list is making a decision on your business’ name. The business name may reflect the names of the partners or it may have a fictitious name. In either case, the name of your business should be registered with your state. Assuming you’ve conducted a comprehensive search of the name you’ve decided on, registration will confirm that no other business exist with the same name and will prevent others from using your name.
The name of your business partnership is a key provision because it explicitly identifies the partnership and the business name for which the agreement exists. This eliminates confusion, especially when there are multiple partnerships and/or businesses that may be involved.
2. Partnership Contributions
In most cases, partners’ contributions (time, resources, and capital) to the business vary from partnership to partnership. While some partners provide start-up capital, others may provide operational or managerial expertise. In either case, the specific contributions should be stated in the written agreement.
It’s also a good idea to include terms that address anticipated contributions that may be required before the business actually becomes profitable. For example, if the start-up investments are not sufficient to carry the business into a profitable state, the partnership agreement should state any expectations for additional financial contributions from each partner. This avoids any surprises down the road for a key contributor.
3. Allocations – profits and losses
Partnerships are formed with the expectation of making a profit. The partnership agreement should speak to the “when and how” profits are allocated to each eligible partner. In addition, it should speak to how losses will be distributed during the business’ operation and in the event of dissolution.4. Partners’ Authority and Decision Making Powers
Each partner has a vested interest in the success of the business. Because of this vested interest, it’s generally understood that each partner has the authority to make decisions and to enter into agreements on behalf of the business. If this is not the case for your business, the partnership agreement should outline the specific rules pertaining to the authority given to each partner and how business decisions will be made. To avoid confusion and to protect everyone’s interest, you need to discuss, determine and document how business decisions will be made.
In the beginning phase, there are many tasks to accomplish and some management roles may overlap (or may only require temporary oversight). While you do not have to address each partners’ duty as it relates to every single aspect of your business operations, there are some roles and responsibilities you need to assign and outline in a formal agreement. Roles and responsibilities related to accounting, payroll, and even human resources are worthy of noting in the partnership agreement because of their critical and sometimes sensitive nature. Even if you have an existing agreement, you may want to update your agreement to address these important managerial responsibilities.
For more information on managing your business’ human resources, read “4 HR Issues that Can Hurt Your Business.”
6. Departure (withdrawal) or Death
When entering a business partnership, it’s natural to want to avoid uncomfortable discussions about a future breakup that may never happen. No one wants to think of a possible separation when a relationship is just beginning. However, business separations happen all the time and occur for many reasons. Any of these reasons can affect you personally and professionally. Therefore, no matter the reason for the separation, the process and procedures for departure should be outlined in the partnership agreement. It’s also wise to include language that addresses buyouts and shifts in responsibility should one partner become disabled or deceased.
For more information on ending business partnerships in Georgia, read “My Partner Wants to Leave – Now What?”
7. New Partners
As the business grows and expands, the increased need for new ideas, new resources, and new strategies grows as well. At times, growth may mean adding a new partner. Plan ahead for these new opportunities in the partnership agreement by specifying how new partners will be on-boarded into the existing partnership.
8. Dispute Resolution
As stated before, disputes are inevitable in any relationship. In business relationships, disputes can become deadlocked and may even require mediation, arbitration, or unfortunately lawsuits. Try avoiding the time and costs associated with lawsuits by requiring mediation and arbitration as a first (and hopefully final) resolution to business disputes. There are many ways to resolve disputes, so your partnership agreement can list alternative methods for dispute resolution. The point is to formally identify these methods of resolution in advance be listed them in the partnership agreement when all heads are cool and clear.
I hope this list of key provisions helps you see the value in documenting the intentions of your unique partnership in a written agreement as opposed to leaving it to state law. Keep in mind that most agreements can be amended as often as necessary. So, your partnership agreement can evolve as your business evolves. You can even state within the agreement that review and revisions will be made at prescribed intervals or as deemed necessary. What’s most important is that you have a well-drafted document that embodies your fundamental intentions and accomplishes your specific business goals and objectives.
Your Thoughts: Considering a business partnership? Are you already in a partnership? What advantages and disadvantages have you experienced? Any tips or advice for those thinking about going into business with someone else?
This article is intended to provide you with general information; it does not constitute any type of legal advice. For recommendations related to your specific matter, we encourage you to review our Practice Areas page for additional information and then contact us to discuss your company’s legal needs.