3 Scenarios to Address in Your Partnership Agreement

Developing a partnership is a big decision. Although you and your partner may get along great right now, that may not always be the case. It’s a good idea to think through a few situations and scenarios where knowing exactly who can do what will be necessary. Thinking about these potential problems now will save you time, money, and, potentially, friendships down the road.

1. What Happens if Someone Can No Longer Run the Business?

Think about how the business will run if someone can suddenly no longer work because of an illness, disability, or death. In fact, a general partnership in California will automatically dissolve if a partner passes away, even if other partners are still running the business.

To avoid this problem, build in what will happen if a partner passes or becomes incapacitated. Will the partnership continue without him or her? Will his or her heirs become entitled to any assets or portion of the profits? Work through this potentially complicated situation with your attorney.

2. Who Makes the Big Decisions? What About Daily Management?

Partners are often more likely to agree about who will run the business on a daily basis. However, they might not agree on who can make big decisions for the company. Then, it also may not be evident when a regular decision turns into a “big decision.” For example, is buying a large piece of equipment that suddenly broke down a daily management issue or is that something that all of the partners should approve first? Does it depend on whether it is equipment that your business needs to function?

Many partners set out decision-making power explicitly in their partnership agreement, and it is a good idea to do so. Dollar limits are a common way to distinguish decision-making power as well.

3. What Portion of the Profits and Losses Does Each Partner Get?

Many people make the mistake of assuming that their partnership profits and losses will automatically be split based on their relative contributions. In reality, each person is a part owner, which means they receive gains and losses in equal shares. That also means that the partner who does not run the business as his or her full-time job will make the same money as the person working 50 hours per week—unless your partnership agreement says otherwise.

It is a good idea to indicate what portion of the revenue each partner will receive. It may be appropriate to the work that they are expected to put in, or it could be a factor of their initial investment. Either way, setting out this information now will help you avoid conflict in the future.

Your partnership agreement may not address every scenario, but it should at least try! Adler Law can help you work through your partnership agreement so that it is as comprehensive as possible. We can also help you if issues crop up in interpreting your agreement or assist when you need to resolve conflict with a partner when there is no agreement.

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