A partnership is formed when two or more people agree to conduct business to make a profit. Every partnership needs to have a solid written agreement. Although not required by law, a partnership agreement is a crucial step to take to ensure there are no misunderstandings about the responsibilities of partners and how the money is used and distributed. This document dictates the relationship between the partners and how the business is run. A good agreement can also decide certain issues in advance — and help to avoid any disputes by addressing them before they arise.
The following are five essential matters that should be discussed in a partnership agreement:
1. The Assignments, Duties, and Contributions of the Partners
A partnership agreement should specify the assignments and duties of each partner, as well as how they will manage their responsibilities. The document should delineate each partner’s stake in the business and their contributions for any future needs. Generally, a partner’s contributions dictate the percentage of their ownership in the business — and these terms are vital to outline.
2. Decision Making
A well-drafted partnership agreement should specify how day-to-day and long-term decisions will be made. Identify which decisions can be made by each partner, and which require a consensus or a vote. A good partnership agreement should outline a system that enforces checks and balances in the business. The agreement should also include terms that specify which partners have the authority to bind the business to a debt or contractual agreement. By establishing clear decision-making authority in advance, you can help reduce the potential for conflict.
3. How Profits and Losses Should Be Split
Often, partners agree to share in the profits and losses of a business under their percentage of ownership or their responsibilities to the partnership. Otherwise, the division can be given to each partner equally, despite their ownership. Profits and losses can also be negotiated and given by applying a combination of factors. A partnership agreement should detail these terms to avoid disputes.
4. How Disputes Should Be Resolved
No matter how well business partners get along, disagreements are inevitable. One of the most important provisions to include in a partnership agreement concerns how any disputes that arise should be resolved. Typically, an alternative dispute resolution clause will be included in a partnership agreement in order to provide a way for partners to settle their disagreements without going to court. Still, partnership disputes are often highly contentious and must often be resolved in litigation.
5. Indemnification and Advancement Provisions
A key part of any good partnership agreement is an indemnification or advancement provision. Advancement provides for legal expenses as they are incurred while a lawsuit is progressing. This concept is not to be confused with indemnification, which lets you recover the costs and losses associated with your legal fees upon the conclusion of successful litigation. Since these critical remedies can be granted only under a contract, agreement, or legal document which provides for them, it is vital to ensure they’re included in a partnership agreement.
Contact an Experienced New York Business Attorney
Every partnership needs an effective agreement in order to be successful. A skillful business attorney can assist with drafting a thorough partnership agreement that will help to avoid potential disputes between partners that could ultimately harm your bottom line. Brinen & Associates is dedicated to providing reliable representation for a wide variety of business law matters, including drafting, negotiating, and litigating partnership agreements. Call (212) 330-8151 or send us a message to learn how our New York Business Law attorneys can help.