What to Consider When Drafting a Partnership Agreement

Starting a partnership can be a very exciting time for new entrepreneurs. When starting a partnership in New York, there are several steps to follow. While drafting a partnership agreement is not mandatory in New York, it is recommended so that there are no misunderstandings between you and your business partners. Executing a well-drafted partnership agreement can help your partnership plan for any future occurrences and help your business run smoothly. In drafting a partnership agreement, there are several things that should be covered.

Each Partner’s Contribution to the Partnership

In drafting a partnership agreement, the agreement should state clearly what each partner will contribute to the business. The contributions listed should not only list financial contributions, but can also list time commitments for the future. A common mistake made during the drafting of a partnership agreement is only addressing the initial contributions of the partners. Failure to address future contributions could lead to litigation in the future.

The Distributions Made to Each Partner

It’s assumed that each partner is in the business to make money and sustain a comfortable way of life. Stating how much each partner will receive from the partnership’s profits is essential. Not only is It important to detail the percentage splits of profits, it is also important to determine which partner will get paid first. If you determine that partners will be receiving salaries, you should note that, and the amount they will receive. You should also determine under what circumstances that salary (and the percentage split) may be adjusted and by whom.

The Ownership Shares

There are endless possibilities that can occur through the lifetime of a partnership. Determining what share of ownership each partner has will go a long way to efficiently handling any changes the partnership may face. Determining ownership shares can help determine things such as taking on new partners, or a partner choosing to withdraw. Additionally, partners should consider what happens in the event of a partner’s death, retirement, or bankruptcy. A well-crafted partnership agreement will provide for each of these situations, and how they will be handled. In order to protect from partners leaving the business, starting a new company, and stealing customers, it is a good idea to add in a non-compete clause here.

Decision Making

This area of a partnership agreement may be the most important. At the beginning of partnerships it is easy to believe that you will always agree with your fellow partners. Statistics say you’re wrong if you think that’s the case. In reality, partners often disagree about mostly everything. Defining how the day-to-day management and long-term decisions will be made is crucial for helping prepare for these situations. Things such as who gets the last say, determining which type of decisions require a unanimous vote, and what decisions can be made by a single partner are good planning tools. By investing time and effort into addressing this section, partners will be laying the foundation for a friction-free business. In this section, or in a separate section, partners should also address the methods of dispute resolution. Partners can choose between options such as mediation, arbitration, or taking it to court. Partners should take into account that if their dispute makes its way to court, it will become a public record.

Dissolution

No one likes to think about the negatives, but it is imperative that partners plan for the possibility of a dissolution. This section of a partnership agreement should set the standards for what events would lead to a dissolution. Partners should also set up a procedure the partnership will go through to accomplish the dissolution. Because State law governs the dissolution of partnerships, reading the dissolution laws in your state will help you plan this section of the partnership agreement.

While there are several online tools to develop a partnership agreement, seeking advice from an attorney is highly recommended. When drafting a partnership agreement, every single word needs to be given meaning. Uncareful wording of provisions can lead to detrimental occurrences, or years of litigation. Taking your time and consulting with an attorney are essential. A partnership agreement may be your golden ticket to avoiding potential legal battles and significant hassles in the future.

Blodnick, Fazio & Associates PC regularly counsels entrepreneurs as to what kind of business structure would be most beneficial for their company, along with other structural and internal governance issues. The firm’s legal professionals assist with the negotiating and drafting of contracts among business owners and between the business and its clients or vendors, when necessary. If you are starting a new business, or if you already own a business and would like to stay current on profitable structuring and various business agreements, the advice and counsel of an experienced business law attorney is often vital. Contact the experienced attorneys at Blodnick, Fazio & Associates, P.C. for a free consultation by calling (516) 280-7105.

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