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5 Important Questions Your Partnership Agreement Should Address

by Karl Pearson • June 02, 2021

Partnership Agreement

Starting a new business is an exciting and challenging process. While many people choose to start a business on their own, others decide to work with at least one business partner. You should probably form a limited liability or a corporation to shield yourself from liability.  The following recommendations apply whether you operate as a true partnership or as a corporation or LLC.

If you are a part of a business partnership, then it is important for all parties involved to have a partnership agreement in place. If you are operating as an LLC, then it will be called an Operating Agreement. This document will clearly define the roles and responsibilities of each partner and help you resolve any disagreements or difficult situations that will inevitably arise. While starting a business without a partnership agreement may seem ideal at the time, you never know what will come up as you begin business operations. Even the most casual business partnerships should have a partnership agreement. Here are 5 important questions your partnership agreement should address according to our small business lawyer in Scottsdale.

What Are the Expected Contributions of Each Partner?

The contributions of each individual partner will vary from business to business. For example, you may have a partner who provides start-up capital, while you handle the day-to-day business operations. It is important to clearly define the specific contributions of each partner in your partnership agreement. This will help you avoid conflict about the division of work and the contributions (time, resources and capital) of each partner.

How Are Profits Distributed in Your Business Partnership?

As a business owner, you have an expectation of making a profit and maximizing your potential earnings. Your partnership agreement should address how you will distribute your business profits between each partner. For example, will one partner receive a higher percentage of profits than the other? Will each partner receive a weekly paycheck for their contributions to the business? Are partners expected to reinvest a portion of their profits into growing the business? These are all important questions that your partnership agreement should address before you begin business operations.

Additionally, your partnership agreement should address how losses will be distributed between each partner. This includes any losses that occur during the business’s operation and in the event of dissolution. Having instructions about the distribution of losses included in your partnership agreement can prevent you from shouldering more of the financial costs and help you avoid conflict with your partners.

Who Has Decision-Making Power in Your Business Partnership?

While you may enter into a business partnership in complete agreement about business operations, this will likely change at some point. It is virtually impossible to agree wholeheartedly about every decision that is made on your business’s behalf. Your partnership agreement should clearly define how day-to-day management decisions and long-term decisions will be made. For example, what types of decisions can a single partner make? What types of decisions require a unanimous vote from partners? What happens if partners cannot agree on an important business decision? Having answers to these questions included in your partnership agreement will help you avoid confusion and protect everyone’s interest.

What Happens if a Partner Dies or Becomes Incapacitated?

No one wants to think about or discuss uncomfortable topics such as death or incapacitation. However, it is important for your partnership agreement to include a framework for addressing the death or incapacitation of a partner. A business contracts attorney can help you include language that addresses buyouts and shifts in responsibility should one partner become disabled or deceased.

While thinking about these issues may feel uncomfortable at the moment, it is important to have processes and procedures for business separation outlined in your partnership agreement. No matter the reason for the business separation, you will feel better knowing that there is a clear plan in place should any unfortunate circumstances occur.

What Happens if There Are Changes in Business Ownership?

There are many situations that could trigger a change in business ownership. You may decide to sell your business, add new partners or buy out an existing partner. Your partnership agreement should thoroughly explain how ownership interests will be handled in these types of scenarios. For example, including a non-compete clause in your partnership agreement could prove beneficial if a partner chooses to leave the business. This could prevent him or her from creating a new company and stealing your customers. An experienced small business attorney can help you draft a document that protects the interest of your business partnership and accomplishes your specific business goals and objectives.

Create Your Partnership Agreement With Pearson Law

Starting a new business partnership can end up being an incredibly fulfilling experience. However, it is not without its pitfalls and challenges. Fortunately, you can take steps to avoid these potential pitfalls and challenges by creating a partnership agreement that protects your business and the interests of your business partners. At Pearson Law, we have years of experience drafting partnership agreements and can offer you sound legal advice during the beginning stages of your partnership. Contact Scottsdale, AZ business attorney Karl Pearson today at (480) 820-1800 to begin creating a partnership agreement for your business or modifying an existing agreement.

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