Being in business with friends and/or colleagues can be highly rewarding, both personally and economically. You and your partners share a common vision, share similar values, and work together to build self-worth and achieve business success. But, disputes arise even among the best of friends. Over the years, as the business grows and your lives evolve — like new spouses, additions to the family — priorities change and bits and pieces of that common vision might diverge. Disputes can be costly both in terms of the disruption of your business and, if it comes to it, legal fees.

A talented California business attorney can help you avoid these pitfalls with a strong, custom-drafted partnership agreement.

What is a Partnership Agreement?

A partnership agreement is the agreement that governs the operation of your business and how you and your partners interact. A partnership agreement does not have to be in writing in California, but it probably should be so that each partner can reference it and have the provisions set in an enforceable writing. Now is the time to resolve potential issues that are foreseeable, when you have the best emotions and the highest regards for your friends and colleagues. If you wait until a crisis develops, emotions will be high and getting to a solution may be nearly impossible.

When writing up your partnership agreement, it is best to be specific; the more details you lay out now, the more benefits you and your partners will receive.

Here are some of the basics that should be included in your partnership agreement.

What is Contributed and by Whom?

What partnership resources, such as money or property, are being contributed by each partner to the partnership and what happens if more capital is needed.

Who is in Charge? How are Decisions Made?

Your agreement should also describe who is in charge and how partnership decisions are going to be made. Probably you want both partners to be “in charge,” but practically speaking, most partners divide the work. Using a floral shop as an example, often one partner will handle the “financial” side while the other handles “customer satisfaction.” It is useful to write out what this means in your partnership agreement.

In addition, with especially important decisions – moving to a new location, taking out a loan, etc. — it is important to describe a method for making such decisions and, importantly, deciding who, has the “final say.” Maybe no one has the “final say” and, if you cannot agree, then there is no decision. Great! Let’s write that down!

Who Can Bind the Partnership? Debts and Obligations

In general, each partner has the power to do all of the tasks necessary to run the business including sign contracts, make purchases for the business, etc. In addition, all of the partners are each 100% personally liable (jointly and severally) for the business debts, obligations, and liabilities.

So, sometimes the biggest worry and risk is that one partner will unilaterally bind the partnership without the knowledge or consent of the other partners.

To avoid this, your partnership agreement should define who can bind the partnership and to what types of obligations. Looking to our floral shop example, everyone is probably satisfied with one partner signing a vendor agreement for a monthly consignment of roses. But maybe not for a bank loan.

What Happens in the Event of Death, Disability, Divorce, or Dissolution?

Your agreement should also describe what should happen in the event a partner dies, becomes disabled, gets divorced, or wants to exit the businessIssues here involve:

• Buyout — amount, terms of payment
• Property ownership
• Allocation of debts and liabilities
• Notice and timing
• Noncompetion
• Confidentiality
• Non-disparagement

Provide for Periodic Reviews

As your business changes, it is important to revisit your partnership agreement and make sure it still provides what you and your partners want. The best practice is to insert provisions that require periodic review of the agreement that also set out a method of amend the agreement, if and as necessary.

When is it Time to Evolve into a Corporation or LLC?

On a related point, many times a partnership grows to the point where it is time for the business to be recast in a more formal corporate structure. Your partnership agreement should set out some of the parameters of when that might be advisable.

Contact San Diego Corporation Law Today

If you would like more information about partnerships and drafting partnership agreements, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard and his dedicated staff provide a variety of legal services for all businesses. This includes forming corporations and LLCs if you feel that it is time for your partnership to take the next step. Mr. Leonard and his team can also provide legal guidance and advice with respect to sales, mergers, and acquisitions. Mr. Leonard can be reached at (858) 483-9200 or via email.

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