Although a written partnership agreement is not required under Arizona law, it is critical to the success of your business, even if you are starting your partnership with someone you know and trust, like a family member or close friend. A partnership agreement is a legal document that dictates how the business is run and details the relationship between each partner. A Phoenix business planning attorney can help you draft a comprehensive, legally binding partnership agreement. The various benefits of a written partnership agreement are discussed below.
1. Avoid Future Financial Conflict
A partnership agreement helps minimize disagreements relating to finances by clarifying each owner’s expectations, obligations, and entitlements. For example, the partnership agreement can outline the amount of money each partner must contribute to start-up costs and ongoing expenses. It should also include other contributions such as property or equipment and their value.
The partnership agreement should also address the profit split, meaning which partners receive which percentages of the profits. In Arizona, partners can decide to split profits however they want. For example, the profit split can be equal, or it can be based on contribution to start-up costs, ongoing expenses, and other factors. The partnership agreement should also include when profit can be withdrawn from the business.
2. Clarify Roles
It is common for partners to jump into starting a business without spending time discussing what their specific roles will be. However, addressing these issues in your partnership agreement is important to reduce confusion and arguments about what each person is contributing to the business. The agreement should list the duties and position of each partner, including their level of authority, decision-making power, specific responsibilities, and management duties.
3. Establish Decision-Making Processes and Voting Rights
A partnership agreement can establish how the partners make business decisions and their voting rights. Creating an effective method of decision-making is critical to the long-term success of a business. Additionally, it provides protection because the partnership is liable for the acts of each partner in the ordinary course of business.
In a partnership, decisions are often made through consensus, a democratic process, or delegation. In a consensus model, decisions are made by the partners after a full and open discussion. In a democratic model, decisions are made by a majority vote. In a two-person partnership, a trusted associate may be delegated with a vote that can break a 50/50 tie. Voting rights could be equal or dependent on how much each partner contributed. Delegation is used to make quick and efficient decisions. Under this model, certain partners or employees are responsible for making specific decisions on behalf of the company.
4. Establishes an Exit Plan
A partnership agreement can create an exit plan for each partner. It can explain what happens when a partner decides to leave, is forced to leave, or must be expelled. The partnership agreement can answer whether the partnership will end or if the continuing partners will take over the assets and liabilities of the partnership and continue the business.
The agreement can also plan for the partnership’s dissolution if both parties are ready to end the business. It can lay out how the valuation of the partnership will be calculated and how the partnership’s interests and assets will be distributed.
5. Control Ownership Through Entry Plan
A partnership agreement can set reasonable restrictions on the transfer and sale of interests in the business and prevent shares of the partnership from being sold to unwelcome new partners. The agreement controls who owns the business and enables the partners to retain their percentage stake. It can specify the circumstances when a new partner can enter the business (i.e., unanimous vote and a minimum contribution).
6. Reduce Impact of Disputes
One of the main advantages of having a written partnership agreement is to reduce the impact of disputes and avoid costly litigation. The agreement is a legal document that can serve as evidence if a disagreement arises. It can also include language relating to how disputes will be resolved (i.e., negotiation, arbitration, or mediation) and who is responsible for the costs. Litigation causes an unnecessary financial loss for all parties and is often a death sentence to partnerships.
Your Phoenix Business Planning Attorney
If you have questions about partnership agreements, you should contact a business planning attorney. Nicole Pavlik is an experienced business planning attorney based in Phoenix, Arizona. Call Nicole Pavlik Law Firm today at 602-635-6176 to schedule a free consultation and discuss your business planning needs.