6 Important Situations to Address in Your Partnership Agreements

A partnership is something to celebrate. That said, you should always enter new business situations with caution. Your partnership agreement can prepare you and your partners for issues related to money, disputes, responsibilities, and more. The following scenarios have been known to arise after the formation of a partnership, so you should plan accordingly in your partnership agreement.

1) We can’t agree on a decision.

Even if you and your partners see eye-to-eye on most business decisions, some matters might leave you divided. To avoid arguments and conflict ahead of time, your partnership agreement should include a section delineating how you will make major decisions together. You might specify that all decisions require a unanimous vote from all partners, or that only major decisions should be agreed upon unanimously.

2) Our partner made a decision without our consent.

As an extension of the first point, you should clarify how much authority each partner has to make minor and major decisions. If you think each partner needs to seek consent from the others before binding the business to an obligation, like a contract or debt, then make it known in the agreement.

3) We don’t know how much money to contribute.

Partnership agreements typically have a section outlining how much capital each person will contribute to start the business. But what happens if the business runs out of money? Your agreement should address the plan of action if your business should need more money before it can see a profit. Decide if you will look for outside investment, if one or more partners will contribute more money, or if you will simply close up shop.

4) We can’t decide how to distribute the money amongst ourselves.

You will need to allocate profits, losses, and draws among your partners. Rather than leaving it until later and opening yourselves up to conflict, discuss how the money should be distributed beforehand. Will you distribute all profits at the end of each year, or will you allocate the money in proportion to each partner’s percentage of interest in the company? Will one or more partners get a salary? When will you be repaid for your initial investment? Decide what’s best for you, your partners, and your business.

5) One of our partners has died.

Partnership agreements should always prepare for the worst case scenario, which is why you need a clause explaining what will happen if a partner dies, develops a disability, or becomes incapacitated. If that partner was you, who would you trust to make decisions on your behalf and who would inherit your shares in the company? Consider whether you want one of your beneficiaries to take your place in the company, and whether you would be willing to work alongside a partner’s beneficiary.

6) We can’t resolve a dispute.

Even if you’ve included the clause about decision-making, you and your partners might start a heated debate that ends in a standoff. Your partnership agreement should probably call for alternative dispute resolution, like arbitration or mediation, instead of taking your disagreement to a court of law. You’ll save yourselves time and money in the long run.

While there is no cookie-cutter formula for a perfect partnership agreement, you should always prepare for the worst. It doesn’t mean you lack confidence in your partnership—it just means you’ve been diligent and took the time to protect yourself and your business from future hardships. The knowledgeable attorneys at Calevoso Law can help you anticipate potential problems far ahead of time. Call us to take a thorough, informed, and decisive approach to your next partnership agreement.