Find out what this legal expert has to say about the pitfalls of partnerships before you even consider bringing another business partner on board.
You'd be surprised at how many clients I meet who have no idea what their partner's background is, how they do business, or what their vision for the partnership is. They rush into a relationship so quickly that they fail to gather even the most basic information about their partner.
Before you sign any partnership agreement, think about the following points:
- Obviously, only go into business with those you trust. Everyone in your business dealings, whether it's a contractor, a tenant, or someone else, should be thoroughly vetted. This may entail running background checks and contacting personal references. This is especially true with your business partner(s) and is by far the most important way to protect yourself when entering a partnership.
- Address potential issues before they become issues. Talk about worst-case scenarios. If your partner refuses to do so for whatever reason, you're attracting the wrong person.
- Before you sign your partnership documents, make sure you read and understand them. A good attorney can assist you in identifying potential issues and presenting solutions, but you and your business partner(s) must ultimately own the agreement and share a thorough understanding of how it will govern your company.
- If using the same attorney as your partner(s) raises concerns, consider hiring separate counsel.
- Have every business partner's spouse sign the partnership/operating agreement and any amendments if you live in a community property state. You want your spouse to agree to the terms of the partnership/operating agreement because they have an ownership interest in the company. This is especially true when it comes to determining how much a business is worth when buying out a partner in the event of a divorce.
Establishing the Partnership
The two most important steps in the partnership process are drafting the partnership agreement and establishing the proper entity/structure for the partnership. The key to designing and documenting your partnership agreement and terms is to understand the mechanics of how your business will be managed. While the list of things to think about in a good partnership agreement is endless—every partnership is unique—I've narrowed it down to my top five:
- Signing and authorization roles for partners. Have a clear understanding of what the company's managers or officers are authorized to do on the company's behalf.
- Each partner's responsibilities and duties. Each partner's responsibilities and duties should be described so that each knows what to expect from the other. In addition, there should be predetermined consequences for partners who fail to complete their responsibilities.
- Capital contributions. What is each partner's contribution to the partnership in terms of time, money, and assets? This includes both the initial contributions and any additional contributions that may be required to keep the business running in the future.
- Distribution, profit, compensation, and loss rights. Any right of the partners to receive discretionary or mandatory distributions, including a return of some or all of their contributions, must be expressly stated in the partnership agreement.
- Requirements for a unanimous vote. Which events or decisions will necessitate the participation of all business partners? It's critical that you and your business partners agree on the procedure right away.
