Starting a business has many challenges, especially if you are doing it with a partner. There are several different types of partnerships in Arizona, including general partnerships (GP), limited partnerships (LP), and limited liability partnership (LLP), and limited liability limited partnerships (LLLP). No matter which you choose to form, you should speak to an experienced attorney about creating a partnership agreement. Having the right partnership agreement can put your business on the track to success.
What is a Partnership Agreement?
A partnership is a business entity or structure involving two or more owners. A partnership agreement is a contract between the partners in a partnership. It sets out in detail the terms and conditions of the relationship between the partners. Well-written partnership agreements are complex documents covering all possible business scenarios, such as disputes, deaths, or ownership changes.
Why Do You Need a Partnership Agreement in Phoenix?
Under Arizona law, a partnership agreement is not required, but it is strongly suggested. It serves the purpose of putting everyone on the same page and setting expectations. It also gives the partners a chance to answer questions about what will happen to the partnership in the future and set up a pathway to settle disputes. Furthermore, a partnership agreement is critical to help avoid legal and liability issues.
What Terms Should You Include in a Partnership Agreement?
Every partnership agreement is unique, but certain terms should always be included in the agreement.
- Partnership Name and Address. The first item that you should include is the partnership name and address. Before choosing a name, you must confirm that the name is available and not being used for any Arizona business.
- Partnership Duration. It is common for partnerships to continue for an unspecified amount of time, but some partnerships are planned to be dissolved after a specific milestone is reached or a certain number of years. Whichever situation applies, it should be included in the agreement.
How much money, property, or services that each partner is putting into the partnership should be detailed in the agreement. Typically, the contributions of the partners will determine how much ownership each has in the business. In addition to the initial contributions, the agreement should spell out what will happen if the initial contributions are not sufficient. Will the partnership end? Will the partnership seek outside investment? Will the partners put in more money?
- Partner Responsibilities. It is smart to include a breakdown of each partner’s responsibilities, so each party knows what they are accountable for going into the relationship. These responsibilities could fall into the areas of general management, finance, production, marketing, sales, or legal compliance.
- Decision-Making. How and when decisions will be made is a critical component of any partnership agreement. What decisions will require a vote by the partners? Is majority or unanimous consent required? What decisions can a partner make on his or her own without notice?
There are several issues relating to compensation that should be covered in a partnership agreement. Will partners receive a set salary or a percentage of the profits? Is the amount of compensation based on the percentage of ownership or do all partners get an equal draw? At what time will the partners be able to take money out of the business? How much of the profits will be reinvested in the business? Will partners get repaid for their initial investments?
- Resolving Disputes. Partners will not always agree on what direction the partnership should take. A mediation or arbitration clause in a partnership agreement can help prevent the partnership from having to resolve disputes through lengthy and costly litigation.
- Death and Disability. You need to be prepared for the worst-case scenarios and prepare for the death or illness of any of the partners. Through the partnership agreement, the partners can answer such questions as who will make decisions, who will inherit shares, and whether beneficiaries will have a say in the partnership. Other estate planning tools, such as wills, trusts, and power of attorneys, will also come into play.
Talking about the end of the partnership in the beginning of the relationship can be uncomfortable, but it is necessary. There must be a plan for what will happen if one of the partners no longer wants to be involved and exit strategies should be discussed.
How Do I Create a Partnership Agreement?
There are many templates of partnership agreements online, but you should not attempt to create a partnership agreement without professional help. An unclear or incomplete agreement is often worse than no agreement at all. Working with an experienced business planning attorney will give you the best chance at success. Investing in creating an ironclad partnership agreement at the beginning of the relationship can help avoid conflict and failure.
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.