Some of today’s most profitable businesses began with an idea, some friends and a partnership. What do you need to consider when entering into a business partnership? According to Don Kochersberger of Streubel Kochersberger Mortimer in Albuquerque, New Mexico, ironing out a few legal details up front is an extremely important part of setting up any business arrangement, and a partnership is no exception.
“It just doesn’t make sense for someone to enter into a money-making venture with another person, even a friend, without putting written agreements into place,” says Kochersberger. Although a partnership is a less formal type of business entity than either a corporation or a limited liability company (LLC), he says, contracts are no less important.
What Is a Partnership?
“A partnership is a type of business entity,” says Kochersberger, “wherein two or more people come together and start doing business without having created either a corporation or limited liability company. It’s a kind of ‘default’ arrangement between co-owners of a business.”
When you create a partnership, there is no requirement to file paperwork with the state - you and your partners simply begin doing business together. Whereas corporations are owned by shareholders and LLCs by members, a partnership is simply co-owned by the partners involved. And while corporations are governed by bylaws and LLCs by operating agreements, a partnership is generally governed by a partnership agreement. There are no standard rules by which a business classified as a partnership must be operated.
A partnership is the least expensive business entity to set up and the simplest to maintain, says Kochersberger, but it’s not without drawbacks. Unlike a corporation or LLC, a partnership doesn’t offer any protection from personal liability. This means that if the business is unable to pay a creditor or court judgment, the partners’ personal assets may be at risk.
Partnership Agreements
“While you have no legal obligation to put a partnership agreement in place,” says Kochersberger, “it just makes sense to flesh out your co-ownership arrangement in advance and put the details in writing.” The purpose of a partnership agreement is to clearly spell out each partner’s rights and responsibilities in order to prevent confusion and conflicts later on.
Compensation, for example, is an essential element of any partnership agreement. “How will each partner be compensated for his role in the business? And what role will each partner play? Who will be in charge of day-to-day operations?” asks Kochersberger. “These are all questions that should be addressed in your partnership agreement.”
Another issue to address, says Kochersberger, is what will happen if one of the partners no longer wishes to be involved with the business. He explains, “You may wish to put into place a process by which remaining partners or even outsiders can buy out the departing partner’s share of the business.”
It is also a good idea, says Kochersberger, to include rules for making business-related decisions. “Will you require the unanimous consent of all partners? For all decisions or just major decisions? Which types of decisions will be considered major decisions?” These are the types of details you’ll want to flesh out in your partnership agreement.
When it comes to formalizing your partnership agreement, Kochersberger advises not to wait. “All too often,” he says, “business partners are excited about their new ventures and not thinking about the importance of putting formal agreements into place. Waiting until things slow down or until your company is making money is the wrong approach.” It is much more cost-effective, he says, to define the relationships between the partners from the very beginning to avoid misunderstandings in the future.
This article is for informational purposes only. You should not rely on this article as a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel. Publication of this article and your receipt of this article does not create an attorney-client relationship.
