When starting a new business, there are many structures under which a person may decide to form the business. If two or more people form the business together, a partnership agreement is an attractive option. When forming a partnership, however, you should resolve many legal issues during the formation process. In this article, we will discuss a few important legal issues that you should resolve in the partnership formation process.
Decision Making Authority
In a partnership, there are many roles the individual partners can take concerning the business. Some partners choose to be hands-on in the business’s day-to-day operations, while others tend to have a more laissez-fair attitude. Designate one partner with the financial decision-making authority. Make them responsible for decisions such as loans, prioritizing bills and debts, final contract details, etc. Don’t forget to give other partners a voice through explicit veto and consent. This helps avoid disagreements on how to run the business and ensures a smooth day-to-day function.
Another issue that many partnerships neglect to resolve is that of ownership percentage. Although it is easy to decide ownership percentage based on a financial contribution to the company, there are other considerations to make as well. For example, if one partner provides their experience in running the business while the other partner is providing capital, should the ownership percentage for both partners be equal?
Unless you are starting a non-profit, most people are starting a business to make money. The same is true for a partnership. Therefore, a partnership needs to outline a compensation structure for the owners of the business.
Ending The Partnership
Most partnerships do not last forever. Whether it is a result of one partner wanting to leave the venture, one partner dying, or no longer having a viable business model; there are many reasons why a partnership may end. A partnership agreement needs to contemplate what happens when someone wants or needs to dissolve the partnership. Without this agreement in place, the partnership can be forced to settle these issues with litigation, essentially ruining the business.
As far as what may happen when one partner dies, if the partnership agreement does not consider that possibility, it may cause the business to be subjected to part of the probate process of the estate. This can create a scenario where an heir to the dying partner’s estate may inherit the partnership and not see eye-to-eye with the other partners or buy into the business model. However, on the other hand, a partner in the business will also want to make sure their estate interests are protected, and the estate will get compensation from the partnership.
Contact Dowd Law
The best way to ensure a partnership can survive all the legal pit falls is to make sure that a competent attorney creates the agreement. The lawyers at Dowd Law have a proven track record in creating partnership agreements. If you are interested in forming a business under a partnership agreement, contact Dowd Law for a consultation.