5 Things You Need to Know About Partnership Agreements
A surprisingly large number of businesses with two or more partners do not have a partnership agreement. Often times, people are so excited about launching their business that they glaze right over this very important document or they put it to the end of their to-do list, which is forever growing. Then one day, a conflict between the partners arises out of nowhere and they desperately need to know what their rights are in that situation. The partnership agreement would have governed their rights, but without it they are often left clueless. While state law provides certain rights in partnership situations, they are few in comparison to what business partners really need.
When I have this talk with people who have business partners, almost all of them have the same response detailing why they do not need an agreement: “we have a great relationship”, “we are on the same page about everything”, “we’re family” or “we won’t have that problem”. The problem is that every single person involved in a partnership dispute said the very same thing once upon a time. While the relationship is good between the partners, it is critical that they develop a partnership agreement addressing situations that they never hope arise.
Here are 5 things you need to know about partnership agreements:
- Every partner needs their own attorney. While you can copy an agreement that your friend’s business used or try to download one from the internet, the stakes are way too high to risk the future of your business (and your livelihood) on a random document you come across. All partnership agreements are not created equal. Your business is unique, you are unique and your needs are too. With that being said, if your business partner retains an attorney to draft the agreement, you need to have a separate attorney look at it. The drafting attorney is preparing the partnership agreement to be favorable to their client. Unless you and your partner met with the attorney together and signed a joint representation agreement, you are not the drafting attorney’s client.
- Outline the roles and responsibilities of each partner. It is not uncommon for one partner to provide the financial resources for the business while the other partner manages the business. If that is the case, that needs to be specified in the agreement. Partners often complain that the other partner is not holding up their end of the bargain. To make it easier and less expensive to enforce “their end of the bargain”, it needs to be in writing.
- Detail what happens if one partner is incapacitated or dies. Imagine this: you have a 50/50 partnership that requires all major decisions to be agreed upon by both partners. One of them has a horrible car accident and is in a coma for months. How do you lawfully make major decisions for the business when you can only provide one-half of the vote? Do you want your business partner’s power of attorney (if they have one), who probably knows nothing about your business, making that decision? Likewise, what happens if your partner dies and they have a will leaving everything to their children. That would, of course, mean that you have new business partners that you didn’t ask for. Although no one likes thinking about this particular subject, it is crucial that you plan for it in your partnership agreement.
- Be specific about how decisions are made. Which decisions require a majority vote and which decisions require a unanimous vote? If you have a minority ownership interest (for example, the ever popular 51/49 split), this information is extremely important for you. If you have a minority interest, you will lose every single decision you don’t agree with that requires a majority vote. So, if there are certain decisions you cannot accept essentially not having a say-so in, those decisions need to require a unanimous vote and that requirement needs to be in writing.
- Make a plan for how partners leave the business. Partnerships do not last forever. People move on to new opportunities, they decide they no longer want to work together, or they simply retire. Your partnership agreement needs to have an exit strategy. More specifically, your agreement needs to state how the departing partner’s financial interest in the business is calculated and, once calculated, how is that interest paid (lump sum or payment plan). If your partner does something to harm the business (e.g., appears on the front page of the local newspaper for the most awful thing imaginable), can you terminate their ownership interest? When partners leave the business, can they immediately start a new business that directly competes with the prior business? If you do not address these issues, and more, in your agreement, it may come back to bite you.
About the Author
Amanda Jelks is licensed to practice law in Tennessee and Georgia. Her firm, Jelks Law PLLC, focuses primarily on legal issues that affect businesses and estates. Jelks Law was selected as the 2018 Emerging Business of the Year by the Urban League of Chattanooga. Amanda has been chosen as a Rising Star by Super Laywers® for the last three years in a row. This award is given to less than 2.5% of attorneys in the mid-south who are under the age of 40 or have been practicing for less than 10 years. Schedule a time to speak with Amanda today.