Better Safe Than Sorry Protect yourself and your business with a partnership agreement.
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Starting a business with a partner? It may be difficult to talkabout problems during your honeymoon stage, but that's exactlywhen you should. A written partnership agreement helps guide youwhen questions arise.
According to W. Thurston Debnam Jr., a partner with Smith,Debnam, Narron, Wyche, Story & Myers LLP, a law firm inRaleigh, North Carolina, a partnership agreement should answer thefollowing questions:
- What is each partner's investment? Isone investing cash and the other energy? Do any of the partners ownequipment that you'll use in the business, and does that factdeserve consideration as part of the start-up investment?
- What are the responsibilities and duties of eachpartner? Be specific about each partner's role inthe day-to-day operations of the company.
- If a partner becomes disabled, how long will he or sheget a share of the profits? If a partner dies, whathappens to that share? A good way to deal with this issue: lifeinsurance on all partners.
- Can the partners have other outside partnershipinterests? In particular, can interest be in thosesimilar or competitive businesses?
- What will you do if one partner wants towithdraw? Typically, you'll set up a buyoutagreement, but it's a very good idea to decide on the termsbefore the situation arises. You'll also want to include anoncompete covenant.
- How will you restrict partnership-interesttransfers? Can a partner transfer his or her ownershipto anyone, or can you limit that transfer? This means the remainingpartners won't find themselves in partnership with someone theyobject to. This is frequently used to protect the business in theevent that one of the partners gets a divorce and his interestbecomes a part of the divorce settlement.
- Can a partner pledge his or her interest as collateralfor a loan?
- Are additional contributions mandatory? Ifthe business needs capital in the future, are partners required tomake capital contributions?
- How will conflicts be resolved? Most often,an arbitrator is used.
Debnam recommends that every business partnership-regardless ofthe relationship of the individuals-begin with a written agreement."It ensures that the partners have the same vision," hesays.
But there's another reason for a partnership agreement."Poorly drawn agreements keep litigation attorneys inbusiness," Debnam notes. "The best reason to have a goodagreement is to avoid the legal fees when you have ameltdown."
Contact Source
- Smith, Debnam, Narron, Wyche, Story & Myers, (919)250-2000, www.smithdebnamlaw.com.
