Partnership Agreements–Why You Need Them for YOUR Business
When starting up a business, one of the first concerns that business partners need to address is having a Partnership Agreement between all of the business partners. This Agreement is like a contract between the partners, and can have different names depending on the type of company (you will generally hear them referred to as either Partnership Agreements, Member Operating Agreements, or Shareholder Agreements). This type of Agreement is essential to the health of a business (and the peace-of-mind of the partners) because it allows the partners to lay out in writing how the major decisions for the business will be made and what will happen in the event of the death, divorce or bankruptcy of a partner. These Agreements allow all of the partners to discuss these issues at the very beginning—when everyone is ostensibly the happiest and most optimistic—versus dealing with these issues later at more emotionally-charged times (such as upon the death of a partner, divorce, etc.).
There are several major issues that a good Partnership Agreement should cover:
Restrictions on Who Can Be a Partner
Most business owners choose their partners very carefully. Being in a partnership with someone is very much like being in a marriage—so you want to make sure you trust that person implicitly and that they are good with their money. But what is something should happen to your business partner—would you want to be in business with your partner’s spouse or kids? The truth is that most business owners would want to avoid the situation where they had to take on their deceased partner’s spouse or kids as a joint owner in the business.
Likewise, what if your partner wanted to sell his/her interest in the business to a real scum-bag—someone you would never want to do business with under any circumstances. It would be horrible if there were no restrictions on your partner that would limit his/her ability to sell to such a person.
A Partnership Agreement can solve all of these issues, by allowing the partners to place restrictions on who can and cannot become a partner. Typically, a good Partnership Agreement will state that no partner can transfer their interest in the business to another person without the prior written consent of the other partners (or, at the very least, without giving those other partners a first right of refusal). Likewise, most Partnership Agreements include automatic buy-out provisions in the case of the death of a Partner, which allows the company to buy-out the surviving spouse or heirs by paying them the Fair Market Value of the deceased partner’s ownership interest. Such clauses can provide quite a bit of clarity and peace of mind for the partners, as it allows them all to negotiate at the very beginning how they want to deal with these types of issues. It also protects the surviving partners from having to be in business with someone who would destroy the company.
Delineating How Major Decisions Will Be Made (and how conflicts will be resolved)
The second major benefit of a Partnership Agreement is that it can state clearly how major business decisions will be made, and how any potential conflicts will be resolved. Without such guidance from this document, it is very easy for partners to find themselves in a high pressure situation with no way to resolve a conflict between them. For instance, if there are two partners in a business, and one wants to start a new product line while the other one does not, they will be in a stalemate if both owners have a 50% share in the business. Or, what if one partner is young and the other old, and the older member wants to start a retirement plan for the business, while the younger partner would rather save the money for future business growth. Without a Partnership Agreement, the owners would be locked in a stalemate that could produce disastrous results.
Partnership Agreements can allow the parties to clearly designate how major decisions will be made and what happens in the case of a business dispute. For most partners, while they hope to never have such a deadlock, it is wise to set forth on paper what should happen in case such a stalemate ever does rear its ugly head.
Partnership Agreements can help cover a myriad of other important issues—such as tax elections, the role of officers in the company, restrictions on what types of contracts each partner can or cannot sign without the prior written consent of the other partners, etc. Many partners do not even consider these issues when beginning a business, but a good Business Law Attorney can help guide the partners in how to write a Partnership Agreement that covers all of these plus many more.
If you and your partners would like to discuss the possibility of creating a Partnership Agreement, call our experienced Dallas Business Lawyers at Cook & Gore, PLLC. We can help walk you through all of the pertinent issues and create an Agreement that will give all of the partners peace of mind and clarity on the major issues facing their new business. Even if you started a business years ago and want to create a Partnership Agreement, we can always help guide you in how to do so.
If you should have any questions about this issue or another Business Law issue, please give our Dallas Business Law Attorneys a call at 214-236-2712.