One of the first important decisions when starting a business is picking the business’s structure. Choosing the right plan can be the difference between profitability and insolvency. For many, partnerships are a good option, but going this route should always include a strong and binding partnership agreement. This can help ensure that all partners involved understand everyone’s responsibilities, financial obligations and legal liabilities.
While some states require a partnership agreement when filing papers to establish a partnership, California does not. Nonetheless, a strong and binding partnership can provide a solid foundation and also outline in advance how certain challenges and disputes can be addressed and resolved.
6 Clauses that should be included
The circumstances of each partnership is unique, but these are a good starting point:
- Capital contributions: This should clearly outline what each partner contributes to the partnership, such as cash, skills, property or other important assets. The percentage of ownership should also be noted.
- Allocation of profits, losses and draws: The agreement should include how the partners are paid (draw) each year, how much needs to remain in the partnership and how debts are addressed.
- Decision making powers: This involves what decisions an individual can make without consulting the other partners.
- Duties of partners: The agreement should clearly spell out the duties of each partner so that everyone understands their role.
- Dispute resolution: Partnerships often have growing pains and disagreements, so it wise to outline how these disputes will be handled (ideally arbitration or mediation without going to court).
- Adding or losing partners: It is important to outline how new partners are brought in or bought out.
Addressing the needs of the partnership
The best way to ensure that a partnership is strong, binding and fair is to work with an attorney who has experience drafting partnership agreements. The right attorney can help avoid misunderstandings and legal mistakes, which often makes for a healthier and more successful business endeavor.