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Do We Need a Partnership Agreement?

Most small businesses are formed by a few passionate people in conjunction with a great idea and a handshake agreement. This is a big mistake, a business partnership is just like a marriage, each partner owes a duty of loyalty, and fiduciary duties to act in the best interests of the company and other partners. Every start-up will find itself with difficult decisions to make so it is important to know who has the authority to make those decisions. Businesses flourish when roles are clearly defined. Everyone needs to be trusted to do their part and most importantly, each person has to deliver.

Everyone starts out with the best intentions, but once money starts flowing and problems start arising, the closest of friends or family can turn on one another. A simple customized operating agreement can solve all of these problems.

Common Partnership Problems an Agreement Can Prevent:

·         One partner decides he doesn’t really want to work hard but still wants his share of the profits.

·         One partner believes she should invest the companies’ profits in new advertising or new labor instead of taking a profit or issuing dividends.

·         One partner believes the business should reimburse its partners for expensive client dinners, and the other wants to operate on a shoe-string budget.

·         One partner wants to commit to the business in the long term, and the other is looking for a quick short-sell profit.

·         Death of a partner.

·         Company dissolution.

·         Mergers and Acquisitions.

·         Issuance of more ownership shares or the ability to buyout another partner.

·         When the partners have equal shares and cant reach a mutual decision.

Partnerships can be very difficult because each partner may be fully and personally liable for business bankruptcy and liability, regardless of the business percentage owned and regardless of the corporate shield. Writing out your operating agreement before these events occur is absolutely essential to a happy business relationship. Even if you are already in business, it is never too late to insert an operating agreement.