Setting Up A Small Business Partnership

What are the unique aspects of setting up a partnership?

To me the biggest aspect of setting up a partnership, especially when I compare it to a sole proprietorship, is the fact that another person is going to be there with you. I think that the most key document if you're going to have a general partnership is to have a contract between the individuals that are the partners; whether it's two or twenty. And that is going to be the document that is going to keep you from fighting and I always like to say the only time that partnerships break up or when things have problems is when things go too bad or too good. If you're just putting along and everything's really great, usually no document or nothing is just fine.

What are the essential terms of any partnership agreement?

In pretty much any agreement, with partnerships specifically, obviously naming out who the parties are, naming out what their duties are, naming how money is put into the business, how money is taken out of the business, how the business is going to be controlled, how other partners are going to be let in, how existing partners are going to be let out, what happens if you decide to wind up the business, all of those things are very very key along with a lot of other general provisions that you will find in almost any contract which is you know whether or not it can be assigned or whether or not its determined by the laws of any particular state.

What are "partnership contributions"?

A partnership contribution is very similar to a limited liability company. They have contributions as well. A partnership contribution is the initial investment and the ongoing or continued investments that each partner would need to make to keep the business afloat. So, for instance, if you, myself, and a friend had decided we wanted to restore an old car; we had a 1967 Camaro that we could purchase for $5,000, and we thought it was going to take $5,000 in parts and then our labour; we would each probably want to contribute $5,000 for the monetary portion of that. Additionally, people can contribute their time and their services, but most of that stuff is after the fact. So, future services that someone's going to perform are really not in consideration in being legalised for a partnership interest so what you would want to do is take a look at those values after the fact.

Should partnership contributions be detailed in an agreement?

I think all partnership contributions should be detailed in an agreement. I mean, it's going to sound kind of obvious and a little bit common sense, but you'd be surprised at how much of the law is common sense. I think that if you detail out and you specify exactly the initial contribution, what every partner is supposed to put in and then how other contributions or additional contributions are going to be coming in or how they'll be asked for, it's very difficult for people to say " Oh well I had no notice or I didn't know that's what you expected of me". So the more detail that you put in, if you already know that six months down you're going to need to call down capital, or if you're going to need to ask for more money from your partners, you might as well put it in there because that's just going to be one less thing that you have to worry about.

Must the allocation of profits and losses be in a partnership agreement?

Allocation of profits and losses, I believe, is a very key portion of a partnership agreement. To go to the lengths of actually drafting up a partnership agreement and to leave out, what I would consider a very vital part, which is, who is going to be able to get the money and how do they get it or, if there is a loss, who has to bear that loss, is one of the things that you will fight about if it's not in there. And, if you don't have it in a partnership agreement, typically it will happen by operation of law. For example, if there is a partnership with five general partners in it, and you have no partnership agreement, then the law will have assumed that everyone contributed 20% and that 20% of all the losses are for each or 20% of all the profits go to each and that could be the case even if all the partners didn't contribute or function equally. If you have a partnership agreement, however, you can actually detail out the percentages and who should get profits or losses and why and when you have it done like that and everyone signs on it's very difficult for someone to come back after the fact and be upset about a document that they signed.

Should management responsibilities be specified in a partnership agreement?

I think that detailing out what management does in an initial partnership agreement is always a good idea. The reason why is that if you have the opportunity to put down what your aspirations are, and what you think people should be doing, it makes it so much easier when you're demanding things of them. If you have three or four or five or twenty partners, and they all have a good idea and have signed a document that says what their responsibilites are, then it's really easy to go to them and ask them and task them for those responsibilites. To the extent that you can, you should be able to do that, and you should do it. I think that you should also be a little bit broad when you do it. If for some reason you have someone you're hiring, this general partner, and they're really good with books, you would say "Oh, well you're going to do the accounting." Well, you might not just want to put it in their duties that they do the accounting. You might want to say that they do counting, and that they would be responsible for financial statements, or for putting out forecasts, or assisting with taxes. I typically like to put in, when I'm doing duties, any other duty that would reasonably or rationally fall to that individual, because no one else would really be the right person doing it. And, as you get on and on, and you keep going with this, if for some reason you get more people or people's duties need to change, then it's easy to go back and amend it and say that this is going to be your duty from now on.

Should outside business activities be disclosed in a partnership agreement?

I don't know if you have to have it in a partnership agreement. But again, I think that the more disclosure, the better. The more people know about every individual partner. And, you know, within reason, the more things that you can put in there it's always goodFor instance if you are in a real estate company and all of you are going to be doing, you know, real estate brokering then if you found out that one of your other, you know one of your partners was doing some sort of real estate, you know, whether they were doing sales of real estate or doing mortgages or doing real estate law on the side, you'd probably want to know about that because you'd want to find out and have the ability to kind of control that person's outside business to the extent that it would affect, negatively, your own partnership business. You wouldn't want someone taking for their own person a partnership opportunity.

Should dissolution be addressed in a partnership agreement?

Dissolution should absolutely be addressed in partnership agreement, and the reason why is because under the laws of most states when you look at general partnership law, if there are two, three, or ten people in a partnership and one of them, for instance, dies or leaves, almost automatically the partnership is dissolved and it no longer actually exists. Something new would actually come up if you start during business under that. However, under the laws of most states, if you're within a certain amount of time, either file some paperwork, or agree as a unit or as the remaining partners to continue the business, you can keep going "business as". The same thing happens if you're doing a "business as" name, which a fictitious business name; a lot of times if you're in a partnership and the partners change, you need to let the state or the county know that as well because otherwise your fictitious business name you're operating under can actually expire.

Can a partnership agreement be modified or changed?

Like any agreement, it can always be modified or changed. The thing that you need to think about, before you draft it and sign it, is how? How many partners need to say yes? Do all of them need to say yes? Do the two that are doing most of the management need to say yes? And then the other thing is being fair about it. So if you have five partners and everyone says, "Well, we share 20 percent, across the board, in all of our finances," four partners shouldn't be able to go on and say, "Yes, from now on, we get 99 percent and the other guy gets 1." So any type of an amendment that would adversely affect only one partner shouldn't really be allowed.

What are the most common mistakes in drafting partnership agreements?

The most common mistake, and there's only one, is that people don't have one. That is the hugest mistake of all. I'd say a good majority, if not 90 to 95 percent of partnerships that are out there, people have some business with someone, they're doing some sort of thing, whether it's out cutting lawns with another kid that's your age, or if it's, you know, two or ten people that are out developing homes without an actual legal entity, they don't have a partnership agreement that delineates their rights. Other than that, a lot of the stuff that we had talked about earlier, which is making sure that the terms are defined, how money is put in, how money is taken out, how partners are added, how they can leave the partnership, those things are just all key terms, and you've gotta be able to have them in there so everyone knows exactly how the partnership should run.