Partnership Agreement? Don’t Forget These Provisions

You’ve probably read it before: if you’re starting a partnership, make sure you have a partnership agreement. But just having an agreement isn’t enough. You want to make sure that what’s in that agreement thoroughly protects you and covers all the issues that it needs to cover.

Here are some things that should be in a partnership agreement, and reasons why they are often overlooked or ignored.

Statement of purpose – It may seem silly to include a purpose in your partnership agreement. But you may want to make it clear in writing what the purpose of the business is, in order to ensure that everybody working for the partnership (including other partners) are not doing things outside of the partnership’s goals. You don’t want overzealous partners expanding the reach, mission, goals, or purpose of the partnership.

Division of profits – This is rarely overlooked-making money is usually on most people’s minds when they start a partnership. But it’s worth noting that you will want to state definitively, how profits are calculated (i.e, before or after what expenses), how often profits are paid out, and how much of the profits each partner will get.

Similarly, you will need to decide what happens if a partner leaves the partnership. Does he or she continue to get any part of the company’s profits? This often happens when someone makes a large initial contribution. They may want to know that if they leave, or retire, that they will continue to reap a benefit from their initial contribution.

Duties – Some partners may just give money, and that’s their contribution. But others may be required to give time, work, know-how, or other sweat equity. What work is every partner giving—and what’s the penalty if he or she doesn’t carry their part of the bargain, work-wise?

Dispute resolution – Partnerships are often small, and thus, disputes can arise within the partnership. When they do, you don’t want the partnership blowing up or getting dissolved. Having provisions that require mediation or arbitration or some other form of dispute resolution, can help you manage disputes that cannot be resolved.

Emergencies and vacancies – Emergencies happen—pandemics, fires, hurricanes, etc. When they do, how will your partnership operate? It may not be able to operate with the same formality it normally operates with, at least temporarily. Your agreement should have some way to at least keep running during short periods of time.

The same goes when partners leave, or retire, or pass away. You may have a situation where you suddenly have an even number of partners (which gets to the suggestion above to have alternative resolution methods to handle voting deadlocks).

If a partner leaves because of death, what happens to their share or interest in the partnership? They may leave it to others that you don’t want to be partners with. Is there a buyout provision for these “unwanted partners,” and if so, how much is the buyout amount?

Privacy – Like any business, your partnership needs provisions for confidentiality, trade secrets, customer lists, and preventing others from leaving and taking those with them.

Starting a partnership? Call the West Palm Beach business litigation lawyers at Pike & Lustig today.

Sources:

investopedia.com/ask/answers/041015/which-terms-should-be-included-partnership-agreement.asp

uschamber.com/co/start/strategy/how-to-write-a-partnership-agreement