Going into business with a partner can be a great way to work. A partnership is one of the most common ways to structure a business when two or more people share ownership of the business. When a partnership functions well, all of the partners stand to benefit and profit. A dispute between the partners, however, could threaten the very foundation of the business. So, here are some ways on how to make a business partnership work
Have a Written Agreement
While the law does not require you to execute a business partnership agreement, doing so will go a long way toward avoiding future disputes. Depending on the type of business involved, this can be either an operating agreement or a partnership agreement. This agreement should be in writing and should specifically address the items in as much detail as possible. Disputes often arise with agreements when they are not transparent or do not provide the partners with the right guidance.
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Addressing these issues may be uncomfortable. However, you must take the time to discuss these issues. It will provide you with an enforceable set of guidelines you can use to navigate severe problems. Some elements that must be included in a partnership agreement are
- The division of ownership among the partners
- The capital contribution of each partner
- How additional capital contributions are to be handled if necessary
- The duties and obligations of each partner
- Partnership compensation
- How distributions are to be handled
- Decision-making procedures
- Conflict resolution procedures
- What happens if a partner wants out of the partnership
- Conditions that can lead to the termination of the partnership
- Dissolution process
- How partner admission would be treated
- What happens if a partner dies
- The admission of relatives of the partner
- How to deal with conflicts of interest
- Communication and meetings
You can organize a partnership as a general partnership, limited partnership, or limited liability partnership. However, you can also organize it as a C corporation or S corporation. Every agreement – not just the operating/partnership agreement – that you and your partner(s) make should be in writing. Getting every significant agreement – both an operating or partnership agreement and other significant decisions – between the partners documented and signed off on is critical. Having documented agreements means that, if there is a future dispute, you can refer back to the written agreement as a starting point for a discussion and, hopefully, resolving the dispute.
Succeeding as business partners doesn’t require having run a business together or even having worked together before. It does require a track record of going through similar challenges together successfully. Look for a partner you’ve handled conflicts with, achieve common goals with, and have survived tough times in the past.
Create Clearly Defined Roles and Areas of Authority
When two or more people decide to start a business and form a partnership, it is safe to assume that all the partners have an interest in the type of business being formed. That does not, however, mean that each partner should play the same role in the operation of the business. Even if all partners have the same percentage of ownership, they cannot all run the business. Deciding ahead of time what role each partner will play in the operation of the business, and specifically what authority each partner will have, can be crucial to preventing disputes down the road. One partner, for example, might be better suited to run the day to day operations while another might be more comfortable handling the accounting, ordering, and record-keeping. However you decide to divide your roles, you should put the details of each partner’s purpose in writing – preferably within the partnership agreement. As with most aspects of your partnership agreement, you cannot include too much detail. Vague or ambiguous provisions of any agreement are ripe for disputes that can lead to litigation.
If the dispute worsens, you should consider hiring a mediator to help you resolve it. It should be perceived as a proactive measure to prevent other, more dire consequences. Many standard operating agreements contain a provision requiring that, if there is a disagreement, the partners must hire a mediator to help them resolve them.
Address Potential Disputes Early and Aggressively
Despite your best efforts, disputes are likely to occur at some point during the business life. The worst thing you can do when they do happen is to let them rot. Discuss the issues early and openly. If you are not able to reach an agreement at that point, look to your partnership agreement. If the agreement was properly drafted, there should be a section on dispute resolution. It may call for the partners to try mediation or another form of alternative dispute resolution before resorting to litigation or dissolution. If so, mediate and try to resolve. If all else fails and litigation appears inevitable, it is time to retain the services of an experienced partnership dispute attorney(1).
An experienced attorney can assist you in preparing the operating or partnership agreement. Often, many individuals will forgo having an agreement or try to prepare themselves (either from scratch or from a template they find online).
Partnership agreements need to be drafted with care because of the number of things that can go wrong. While right now, it may seem like everything is alright, but you need to think of what might happen in the future. If you’re unsure of what agreement templates to draft, check out our bundle of agreement templates.