Do You Really Need a Partnership Agreement?
“We are a very small business. Do we still need a Partnership Agreement?”
Chris Reich provides business partnership advice.
YES! Here’s Why You Do
Even the best of friendships break down. When friends get into business together, they never expect that the relationship might fracture. 50% of marriages fail despite being based on much more than a desire to make profits.
Search online and you’ll see that 60-80% of partnerships fail. Even long established partnerships can hit the rocks. I know, I deal with partnership tension every day. A Partnership Agreement can protect you from what ought to scare you more than an IRS audit: Ending up with a partner you do not want.
How Does a Partnership Agreement Protect You?
Let’s say you’re finally starting to make a little money. It’s been a tough couple of years and now the business is known and you’re getting decent sales. It’s about time that the partners take a little salary from the business.
You think the business can afford to pay you and your partner $1,000 a month each. That’s not a lot, but if the business keeps growing you can increase that amount in a few months.
Your partner’s wife, on the other hand, thinks you should get $500 and your partner, who works a lot harder in her opinion, should get $2,000. She’s been a source of problems between you and your partner before but you’ve always overlooked it. He has to live with her, not you.
Then it happens. You get a call that you partner has been killed in an accident. You are devastated. He was your friend as well as your partner. But here’s the kicker. His wife is your new 50% partner. Good luck dealing with that.
Partnership Agreements Protect the Partners AND the Business
You want your Partnership Agreement to include what happens under the following trigger events:
- Death of a Partner
- A Partner Becomes Disabled
- A Partner Walks Away from the Business
- A Partner Demands to Be Bought Out
You can specify in your Partnership Agreement that the surviving partner becomes the sole owner if a partner dies. The deceased partner’s interest returns to the business and the business pays the estate a specified amount. There! You just avoided getting a partner you do not want!
I won’t get into all the details about how to address each point, but I do encourage everyone in a partnership to get a good Partnership Agreement in place. And yes, you can do it yourself with a little guidance.
More Partnership Questions?
Don’t hesitate to reach out to Chris anytime
50/50 partners split the profits 50/50. It is possible to have an agreement that specifies a different formula as long as you have a signed agreement.
You and your partner have decided that you no longer want to continue in business together. You have decided to dissolve the LLC but you want to continue in the same line of business using the infrastructure from the business you are closing. That can be simple but there needs to be a few steps taken to avoid liability.
“My partner put up $10,000 and I worked for a year getting the business going. I always thought we were equal partners. My partner says sweat equity isn’t worth the same as real money. Is that true?”