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What Business Owners Should Consider When Writing Partnership Agreements

What business owners should consider when writing partnership agreements

When drafting partnership agreements, partners should weigh each person’s role, viable exit strategies, worst-case contingencies and an attorney’s advice.

Forming a business partnership can offer many advantages for entrepreneurs in Phoenix, including cost savings and collaboration. However, it can also introduce the potential for conflict. Partnership agreements are essential for most non-corporate businesses, and although these agreements are not legally required, as the Small Business Administration notes, they are an important part of good business planning and operation.

Unfortunately, a narrow or hastily drafted partnership agreement will not offer much more protection than an informal agreement. It is therefore critical for partners to make sure that these issues are considered before they sign any proposed agreements.

Each person’s role

A partnership agreement should clearly define the role that each partner will play in the business, according to Forbes. The minimum issues that one of these agreements should address include:

  • The skills, services and financing that each person will contribute
  • The salaries or distributions that each partner will may receive
  • The percentage of ownership that each partner will hold

The agreement should also address how profits or losses will be distributed among the partners.

Worst-case situations

A partnership agreement should also outline how partners will address any business or partnership disputes that eventually arise. As an example, an agreement may grant final decision-making authority to one partner or specify a process that the partners can use to come to terms. An effective partnership agreement should also stipulate whether irreconcilable disputes will be resolved through mediation, arbitration or other means.

The potential for one partner’s incapacitation or death should also be addressed in a partnership agreement. Specifically, both partners should consider whether they would be more comfortable with a buyout of the partner’s share, a third-party succession or the dissolution of the business.

Exit strategies

A well-written partnership agreement also should provide exit strategies that allow one person to leave the partnership or give both parties the option of completing a partnership dissolution. Discussing these matters early in a partnership can be uncomfortable. Partners should remember, however, that forming exit strategies early on might head off significant conflict and losses later.

Potential legal issues

People who rush into signing partnership agreements without proper legal advice may later regret those agreements or miss out on the time and cost savings that an effective agreement can offer. Forbes recommends that partners consult with an attorney to review the legal implications of any proposed agreements. An attorney may help catch potential oversights and ensure that a partner does not agree to unreasonable terms.

The attorneys at Murphy Karber Cordier PLC have extensive experience creating and reviewing partnership agreements. People who need assistance during this critical process should call the firm at 602-274-9000 for advice on protecting their business and their long-term interests.