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Understanding the “Why?” and “What?” of Written Partnership Agreements

Written-Partnership-AgreementsThere are bumps in every road to success. That is part of the reason why having a written partnership agreement is so essential for business partners. Written partnership agreements clarify each partner’s rights and obligations in the relationship, but they also lay out what will happen if the unthinkable occurs, including death or incapacity of one of the partners. Every partnership should have a written partnership agreement.[1]

The Why: Why Do We Need a Written Partnership Agreement?

In a healthy partnership, you will negotiate along the way and make joint decisions. Your Partnership agreement will determine what is to be done if you and your partner can no longer agree, and allows you to define your own rules within the partnership. If you fail to lay out specific rules, then the default rules in Florida that apply to partnerships will apply to your partnership. These default rules define vital aspects of your partnership, from voting procedures to splitting profits and losses. The defaults do not work for every business, and documenting your unique agreement holds all parties accountable by clearly defining roles and responsibilities.

Having a written partnership agreement also allows the parties to agree on important issues before they become problems, such as how disputes will be handled by clearly defining a dispute resolution process. It also allows you to include procedures on how to remove a non-responsive or inactive partner and develop processes on how to protect minority or majority partnership interests.

While a simple verbal agreement may technically be legally enforceable to some extent, it does not help in situations when parties disagree about what the original arrangement should have been. Having a written agreement forces partners to consider and clearly define various aspects of their partnership.[2]

The What: What Key Elements Should Be Defined in a Partnership Agreement?

You can build and customize your partnership agreement to fit you and your partners’ needs in the relationship. Your partnership agreement can be as unique as your partnership. There are, however, a few items that you should be sure to include.

  1. Ownership Percentage.You should lay out how much of the partnership each partner owns. State the amount of money that each partner is contributing at the outset so this factor does not become an issue down the road.
  1. Profit and Loss Allocation. Specifically state how much each person will receive in profits and losses. Sometimes these are allocated in terms of the partner’s ownership, but this is not always the case. Your agreement can allocate losses and profits however it sees fit.
  1. Decision Making Processes. Your partnership agreement should explain how the partnership will make decisions and who can bind the partnership. Will there be one managing partner while the rest are investors? Should every decision include all of the partners, or should only certain decisions be voted upon?
  1. Resolving Disputes. You should incorporate a method for resolving disputes as well. Sometimes voting procedures are enough, but not always. Is mediation or arbitration an option for your partnership? Failing to include a clause about disputes could mean that you will have to go to court to resolve a dispute, which is time-consuming and expensive.
  1. Death of a Partner. If one partner passes away or wants to leave the partnership, how will your partnership handle that? Under Florida law, if one partner leaves, that could dissolve the entire partnership if you do not have an agreement that states otherwise.

Partnership agreements are vital to any partnership, and it helps to have a professional who can draft your agreement. Muir & Associates can help you consider various aspects of your partnership that may not have occurred to you and draft a partnership agreement that is both comprehensive and enforceable. Call today to set up a consultation with our skilled business law attorneys.

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