6 Situations to Address in Your Partnership Agreements

When businesses are set up as partnerships, the partners must decide on many different aspects such as how workload and profits will be divided. There are also particular situations that may arise during the lifetime of the business, and it is wise for partners to agree on what action to take in any given situation before the partnership forms.

The clearer and more specific parties are from the outset, the less potential there is for future conflict. Partnership agreements should address the following questions:

  1. How are the roles defined?

Deciding who does what in a partnership is important. Not only should each partner have a firm understanding of their role and what is expected of them, but they should also make sure they are aware of the other partner’s responsibilities too. If work is not shared evenly amongst partners, what effect will that have when it comes to distributing profits? Decision-making power is also vital to define, as well as a clear process setting out how disputes will be handled and if ultimate authority lies with one partner over the other.

  1. How much will each party contribute (financially or otherwise)?

A partnership agreement should plainly state each partners stake in the business and their contributions up front, as well as any ongoing contributions. Money, staff members, equipment, and time should all be included, and the agreement should also be unambiguous on which partner(s) will be responsible for the business’s future needs.

  1. How do the partners get paid?

How profits are divided and distributed also needs to be agreed on upfront and set out in the partnership agreement, as well as who gets paid first. If partners are being paid a salary, the amount should also be stated in the partnership agreement.

  1. What happens if one partner dies, or if one partner wants to leave?

The partnership agreement must also state who owns the business, and outline what will happen should a change in ownership occur. For example, if one partner wants to leave, what happens? Are there options for buying out another partner? In the event of any partner’s death, how will their share of the business be transferred or distributed? Partners should also consider adding a non-compete clause to prevent one partner from setting up a rival company and then stealing the original business’s customers.

  1. What about other critical developments that could affect your business partnership?

Other situations that may arise include:

  • One partner retiring
  • Receiving an offer to buy the company
  • One partner becoming sick and unable to work

These, and any other circumstances that might make changing the agreement necessary should also all be reviewed and decided in the partnership agreement.

  1. What happens when it’s time to dissolve the company?

Setting out the steps that are legally necessary to dissolve the partnership is also wise to include in the partnership agreement. It is advisable to research which laws are applicable in your state so that all parties understand what will happen if they are unable to continue working together.

Setting out the above in a partnership agreement and making an effort to answer these questions explicitly and entirely will help avoid any future disputes and allow your business to run as smoothly and successfully as possible. If you are entering into a partnership, and would like help to ensure you create a partnership agreement that covers all potential situations, call us today at (978) 288-1468 for a free, 30-minute consultation.

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John Espinosa, Esq.

John Espinosa helps entrepreneurs do business right by providing convenient access to quality legal advice and services, with more than 15 years experience in the legal field from multiple perspectives.

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