Forming a partnership can be an attractive option for groups of people going into business together because partnerships are often cheaper and easier to set up than corporations and other business structures. The following are a few considerations worth looking at prior to entering into a partnership.
The Partnership Agreement
A partnership often begins with a formal agreement that becomes the private law of the relationship. This contract is vitally important. It will establish the rights and obligations of each partner. The partnership agreement will outline the purpose and direction of the new endeavor and also contains important information about what happens if things go wrong.
When it’s Personal
Partnerships are often formed between people with existing relationships. Working with friends and family can be rewarding but also comes serious with risks. Even the most successful business venture will encounter setbacks, and these hurdles can be taxing on a personal level. In the event that the partnership has to be dissolved, the comingling of friendship and financial stress can cause serious anxiety and bitterness. Disputes can get messy, especially if litigation becomes necessary.
Getting it Right
None of this is to say you should never go into business with someone you’re close to. When it’s done right, working with a spouse, relative, or friend can be incredibly fulfilling. Partners who know each other well can have advantages like effective communication and the ability to rely on complementary strengths.
As previously mentioned, a solid partnership agreement is essential. Clearly drawn out duties can prevent squabbles, and well defined rights can keep partners from fighting over the details upon termination. Think of the contract as an opportunity to stop, or at the very least address, the proper procedure for disputes before they start. Whether personal relationships are in play or not, it’s best to get everything on paper so that conflicting assumptions don’t cause tension.
For example, a thorough partnership agreement may cover:
- The allocation of profits
- Who has final decision making authority in different matters
- Who is authorized to enter contracts on behalf of the partnership
- Who is responsible for daily administrative tasks
- The division of partnership property in the event that one partner wants out
- How and when partners recover any investment they have made in the venture
- What happens in the event of a partner’s death (wouldn’t you rather worry about this in advance?)
If you are considering going into business, The Rhine Law Firm, LLC can help you evaluate your options and protect your interests.