Preventing Partnership Disputes: Drafting a Partnership Agreement That Can Go the Distance
When you decide to go into business with someone, you think about many things. It is great to have a partner, as two heads are better than one. It is also a much more exciting endeavor when you are working with a friend, and sometimes having a partner can also lead to an exponential increase in profits. Working with a friend or close acquaintance is common in many businesses today.
By law, a partnership is formed when two or more individuals carry on as co-owners in for-profit businesses, whether or not they intend to create or form a partnership. This means that all you need to form a partnership is an agreement with another individual to operate a business for profit. For example, if John and Sam agree to split profits 50/50 and to sell lemonade for a profit at 25 cents per glass on the corner of ABC Avenue, they have theoretically entered into a partnership by law.
Unfortunately, in many of these situations, disputes arise, even amongst friends. However, many of the disputes that arise in partnerships can be avoided when a written partnership agreement is drafted.
Why Partnership Agreements Are Important
A partnership agreement can prevent many legal issues that may arise and any potential disputes amongst partners. The most important terms in the partnership agreement are the terms and conditions of the partnership. These terms should include:
- Name of the business
- The goal of the partnership
- Each partner’s percentage of ownership of the partnership
- Percentage of profits each partner is entitled to
- The manner in which profits are distributed
- How and when important decisions are made
- How to handle the withdrawal or death of a partner
- The procedure for introducing new partners to the partnership
Typically, the best practice is to set up the partnership equally so that each partner has an equal interest in ownership in the business and shares equally in profits. The most common partnership disputes arise when one or more partners are being treated unequally, or when they believe they are being treated unequally. If all partners are treated equally, the chance of a partner feeling or being treated unfairly is significantly reduced, if not eliminated.
Contact an Attorney
Many individuals starting a new business forego hiring an attorney to draft a partnership agreement; or worse, they try to prepare an agreement themselves. This may be the case because they are excited to begin working on their passion or may believe the money spent on an attorney is not worth it.
However, hiring an experienced business litigation attorney will save you thousands of dollars down the road if there is an ambiguity in the agreement or if a partnership dispute arises that cannot be reconciled. If you invest some money in that now, you will avoid many headaches in the future and can focus on growing your business.
Consult a Business Attorney
No matter what your business issue is, a business lawyer, like a business lawyer in Washington, DC, is there to help. Call today to schedule a confidential consultation.
Thanks to Brown Kiely LLP for their insight into drafting a partnership agreement for a new business.