Partnership Agreements: Clauses to Help You Avoid and Resolve Disputes
By: Timothy Lynch, President and Managing Principal of Legal Affairs
Entering an agreement on a handshake is a romantic, but flawed, notion. Your agreement remains in place only as long as you both agree. No matter your relationship — old friends, long-term colleagues, family members, partners — eventually you and your partner will likely disagree about something. When you and your partner’s life or business priorities change and when divergent financial interests are at stake, the resulting disagreement can quickly turn ugly.
While the law does recognize the “gentlemen’s agreement”, all too often the resulting disputes are anything but gentlemanly. Oral agreements are enforceable, but proving them is difficult. Often, the communications that formed the deal are not documented, and the ones that are may be interpreted — and sometimes remembered — differently by each party, making this type of evidence subject to third party interpretation in court.
During the excitement of launching a new company, it may be hard to imagine that the key visions you and your partner share could diverge. When the honeymoon stage is over, a solid, well-drafted partnership agreement can help you minimize disruptive disputes and guide you in resolving conflicts in a fair and effective manner — thereby saving a lot of money on legal fees and, sometimes, saving the very business itself.
Your partnership (or ownership) document is like a pre-nuptial agreement. It governs, among other things, the owners’ rights and responsibilities while running the business and how to deal with disputes among owners, especially problems that cannot be resolved easily. The provisions of your agreement should reflect factors unique to your company and partnership. For this reason, it is important to have a qualified corporate attorney negotiate and draft an agreement designed specifically for your partnership.
Common Provisions in a Partnership Agreement
Although some terms depend upon individual circumstances, standard language in a partnership agreement typically includes:
- Decision-Making Authority Delegation: Who decides day-to-day issues? What about weightier matters? Will you put decisions to a vote? If so, does the decision need to be unanimous or majority rules? If partners have equal say, what happens when there is a tie? Some silent-active partner arrangements allow a silent partner a voice about monumental matters, while giving the active partner authority over daily operations. In others, a silent partner makes no decisions. By clearly delegating decision-making authority, you may avoid potential infighting when opposing viewpoints arise.
- Capital Investments: The amount of money each partner contributes to the business should be unambiguous. If a partner is investing work equity, make sure the parties know what those duties and talents are and consider setting benchmarks to judge the progress made by the working partner.
- Profit Distributions and Salaries: Hopefully sooner rather than later, your company will turn a profit. How do you intend to divide the fruits of your labor? How much money should be put back into the business? Will you each receive an income or a percentage of the profits?
- Death and Divorce: You agreed to go into business with your partner, not his/her spouse or child. Yet, a spouse or an heir may claim an interest in the company during divorce or probate proceedings. A partnership agreement can prevent intrusion by an outside party who might otherwise have legal rights to company assets.
- Dissolution: Make arrangements for dissolution before you or your partner decide to end your relationship. Otherwise, arguing over dissolution terms might burn through the profits you earned while in business together. An organized exit strategy might include buyout options or require distribution of property.
Ideally, you and your partners should create an agreement at the business’s inception, a time when you likely see eye-to-eye on core issues. However, if you are already in business on a handshake, it is not too late to enter into a partnership agreement.
About Timothy Lynch
President and Managing Principal of Legal Affairs
firstname.lastname@example.org | 410.209.6436 |
Timothy Lynch is a litigation attorney and a member of the firm’s management committee responsible for the management of all legal affairs of the firm. Mr. Lynch’s practice is focused on complex civil litigation matters as well as acting as outside general counsel to many owner managed businesses and entrepreneurs on a wide array of business issues. In addition, Mr. Lynch serves as a corporate advisor to senior level executives, physicians and professional athletes throughout the United States. He serves as a board member for several privately owned companies advising on growth and management issues.