If you are starting a business with one or more partners, trust may be one of your greatest assets. Many business owners begin with a shared vision and a verbal understanding of how the company will operate. In the early stages, that may seem sufficient.
Problems can arise when partners do not agree on profits, who can make decisions or what happens if ownership changes. A written partnership agreement can document expectations and establish procedures for handling common business events before disputes develop.
Clear rules for profits and decision-making
Many disputes begin when partners have different expectations about money or control of the business. Your partnership agreement can define how the business will run and who can make key decisions. Common provisions include:
- Allocating profits and losses among partners
- Defining each partner’s role
- Identifying who can make routine decisions
- Addressing future investments in the business
- Establishing expectations for additional capital contributions
These provisions can identify who may act for the business and how partners will handle company finances.
Buy-sell provision
Business ownership may change over time. A partner may retire, become disabled, file for bankruptcy or decide to leave the company. Without a written process, those events can lead to disputes about ownership and value.
A buy-sell provision sets rules for ownership changes before they occur. These provisions often explain when a buyout can occur, how owners will determine value and who may purchase a departing owner’s share. These terms can help the business handle future ownership changes.
Exit strategy and dispute resolution process
Even successful businesses can face disagreements between owners. A partnership agreement can set rules for handling those situations without disrupting the business. Important procedures may include:
- Describing the process for an owner’s departure
- Addressing ownership transfers
- Limiting competing business activities
- Resolving deadlocks between owners
- Creating a method for resolving management deadlocks
These provisions can help owners resolve disputes and respond to major changes.
Businesses rarely stay the same
The agreement you sign today may need to address events that happen years later. New partners may join the company, ownership may change and business goals may change over time.
A partnership agreement can set rules for handling those changes before they happen. When an agreement addresses both current needs and future events, it can help the business remain stable over time.
For more information about partnership agreements and business law matters, contact Max L. Lieberman & Associates at (215) 646-3980.
