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3 reasons to have a written agreement before entering a partnership
July 19th, 2023
Nancy Wood Stabell
Starting a business with friends or associates can be thrilling, but it’s crucial to establish a written agreement before entering a partnership. Although it may seem unnecessary to formalize an agreement with someone you trust, it’s a critical step to prevent future conflicts. Building an agreement in writing should provide a path to resolution if you and your partner(s) ever find yourselves at odds.
Here are three reasons why a written agreement is vital when entering a partnership, to ensure the success of your business and protect your personal interests.
1. A partnership agreement lays the foundation for success in your business.
Retaining a legal document that displays the responsibilities of each partner will prove vital from the inception of your business to when it’s time for you to step away. Ask yourself: what are the goals and objectives of the partnership, and what do responsibilities look like for each partner involved? How are we going to make decisions?
It is also essential to consider the timing of when to write an agreement. Whether you are networking at an event or having a conversation on the green, we recommend obtaining something in writing as soon as you go into business, start a program or are approached about expansion opportunities.
While you may hear entrepreneurs say, “It all started on a cocktail napkin,” the next crucial step is to solidify everything with a formal agreement to protect all parties. In my experience, if someone is unwilling to take this step, this is a red flag and a reason to reconsider going into business with an individual.
2. Entering a partnership doesn’t mean you have complete control over your business.
I know this is hard to grasp. Just because you enter into a collaboration with basic contract items does not mean you are prepared for unpredictable yet inevitable life scenarios.
I highly recommend including details that cover essential decisions in your agreement. This can include the proposed length of the partnership and what happens when it ends, or action steps on how to proceed if one of the partners cannot continue operating the business. Be sure to ask yourself about the financial and legal implications of entering the partnership by broaching questions such as how the profit will be allocated among the partners or whether there is a procedure for admitting new partners.
For instance, consider a scenario where one partner would like to sell the business while the other partner does not. With situations like this, it is crucial to establish beforehand how such decisions will be made and outline the process involved. By proactively addressing this issue in your partnership agreement, you can avoid potential conflicts and uncertainties that may arise later on.
3. Running a business comes with a set of disagreements and challenges.
As time passes, it is only human to have differing recollections of conversations. An explicit written agreement can minimize disputes and give guidance when issues arise with your partner.
I have seen many examples of this in my practice, ranging from disputes on major hiring decisions to how to handle executive compensation to decisions regarding taking on business debt. Clearly defining the decision-making process and the specific steps involved will provide a framework for handling differing perspectives and ensure a smoother resolution to disagreements like this.
Having an attorney write or review your partnership agreement is always a good idea. (Full disclosure: I am an attorney, but you have many options in this space.)
Your partnership agreement is undeniably one of the most vital legal documents your business will possess, even if its significance may not be immediately apparent. Should the day arrive when the partnership concludes, having a well-defined exit plan in place will safeguard your personal interests and mitigate potential legal complications.
It is important to note that each state has its own set of laws, which may or may not apply to your specific type of business. By establishing a comprehensive partnership agreement from the outset, you can typically circumvent the complexities of state laws that often prove confusing, as the partnership agreement ultimately governs your business.
Meet Nancy Wood Stabell
Nancy Wood Stabell is an attorney and business owner with a law degree, an MBA, and two decades of experience delivering results for sophisticated small and medium-sized businesses, entrepreneurs and investors. Her deep background in entrepreneurship and law allows her to take an innovative, business-oriented approach to the legal issues her clients face.