About Partnership Agreements
Unlike sole proprietorships and corporations, partnership agreements inhabit the netherworld of business. Partnerships can take an infinite number of forms and can cover many businesses, projects and situations. Give thought to the future before you execute a partnership agreement.
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Misconceptions
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Partnership agreements appear to be a simple way to start and run a business. This is the prime reason that the future sometimes brings issues that can be problematic. For example, John and Steve start an auto repair business. They are 50/50 partners and share the workload. At the end of the year, they will split the profits and ride into the sunset.
But how will they split the duties of running the business? Who is responsible for the bookkeeping, accounting and bank accounts? For ordering parts and inventory? For working weekends? For keeping the garage and tools in order?
Most importantly, who makes the final decision or casts the tie-breaking vote if John and Steve want different courses of action?
Risk Factors
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If partnership agreements have general language, they sometimes create risk where there appeared to be little or none. Agreements should be structured to cover worst-case scenarios. Parties to business agreements tend to be on the same page at signing; otherwise, there would be no agreement. All potential areas of disagreement should be addressed as document creation. Incomplete agreements have the potential to generate high operating risk to otherwise successful businesses.
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The Facts
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All states in the U.S., except Louisiana, have laws regulating partnerships. Typically termed the "Uniform Partnership Act" (UPA or similar designation), these regulations stipulate how partnerships will operate. If an issue arises that is not addressed in your agreement, the UPA will apply to disagreements.
Partnerships are effective when applied to project types of business. For example, you and some associates purchase some land to construct condominiums. You're not interested in a long-term relationship. An agreement that applies to just this project might be perfect. Your percentages, duties, responsibilities, cash contributions and other issues can be part your agreement. At completion, profits can be distributed and the partnership dissolved.
Benefits
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Partnership agreements can specify all the rights, duties and responsibilities of the partners to eliminate disagreements in the future.
For example, if Partner A is responsible for all bookkeeping, then Partners B, C and D should be comfortable with this function. Should Partner A neglect this responsibility, penalties or revised duty deployment can be invoked.
In a project situation, partnership arrangements may be better than corporations. Specify the project you're going to complete, set time limits on the partnership, identify responsibility for duties and limit or expand partners' liability in the event of problems.
Significance
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While not ideal for all situations, partnerships are beneficial to some. It is imperative that you construct your agreement as specifically as possible. If you are looking at a longer-term operating business with no predictable end, you should consider a corporation. Always get professional assistance. Your lawyer, accountant or business adviser has expert input to help you decide which way to go. The key is to select an arrangement that works now and will continue to work in the future.
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