Considerations for Entering Into a Business Partnership

Before you even think about adding another business partner, read this legal expert's thoughts on the dangers of partnerships.

You would be shocked to learn how many clients I encounter who are unaware of their partner's history, business practices, or relationship goals. They enter a relationship too soon and neglect to learn even the most fundamental details about their companion.

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

Drafting the partnership agreement and choosing the appropriate company or structure for the partnership are the two most crucial elements in the partnership process. Knowing the ins and outs of how your firm will be run is essential to creating and recording your partnership agreement and agreements. Every partnership is different, therefore there is an unlimited amount of factors to consider in a solid partnership agreement, but I've whittled 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.