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The Importance of a Written Partnership Agreement

One of the areas that we get the most questions about is contracts - in particular, contracts relating to small business owners. We are frequently asked whether the owners of a small business need to have a written agreement in place or if a handshake is good enough, and even if they do have an agreement in place, is it sufficient and does it need to be updated. These are just a few of the questions we hear a lot!

Over our careers, we have litigated cases involving business disputes where the parties either failed to enter into a written agreement, or they failed to update it and at the point that they were involved in a dispute, the agreement was simply outdated or the terms were not clear. Through litigating these issues, we have learned the importance of having a written agreement in place.

In business partnerships, for example, partners should have a clear understanding between them about what their roles and responsibilities are, what happens if certain circumstances arise, what happens if a dispute arises between the partners, what happens if a partner passes away, and so on. Negotiating a written partnership agreement when things are good between the partners assures that you will have an agreement to fall back on if and when things aren’t going well.

A written partnership agreement is an agreement between the partners that defines the terms and conditions of their relationship, including the following:

  • The powers, duties and responsibilities of each partner;

  • The percentages of ownership and distribution of profits and losses;

  • How and when the partnership can be terminated;

  • The duration/term of the partnership;

  • What happens upon the death or disability of a partner;

  • The terms under which a partner can buy out another partner; and

  • How a dispute will be handled if one should arise between the partners.

It is important to have a written partnership agreement in place from the beginning of your partnership. In the agreement, you can identify the roles of each named partner and whether they change under certain circumstances, as well as the liability of individual partners (if any), potential changes in the partnership due to the death or disability of a partner, and handling disputes that might arise. The partners could agree, for example, that any dispute between them would be resolved by mediation or arbitration, as opposed to in court, and could outline how a mediator would be selected, and how the cost would be covered. These are not issues that are fun to think about when you are starting out in a partnership and things are going well - no one wants to envision a situation when their partnership does not work out.

It is important, however, to think about the possible scenarios that could arise where a resolution or process for resolution could be agreed upon now. One of the advantages to hiring an attorney to help you prepare a written partnership agreement is that an attorney can help you avoid using language in the agreement that is unclear or incomplete. In addition, an attorney can work with you to understand your business and the relationship between the partners to make sure that the agreement is appropriate for your circumstances.

Once you have these agreements in place, it is also important to review them periodically and update them as necessary to make sure they are current.

For example, if you own a small business with three other partners, and have not updated your partnership agreement in several years, you should take a look at it and consider reviewing it with your attorney. You might go back and look at them only to find that they need to be updated for a variety of reasons!

Two questions to ask yourself today if you are a business owner - do you have the appropriate agreements in place and, if so, when was the last time you looked at them? It might be time to take a look and update them!

Disclaimer: The information contained in this post is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls and communications. Contacting us, however, does not create an attorney-client relationship.

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