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Negotiating Your First Partnership Agreement: Five Things to Remember

By December 7, 2022No Comments

A partnership agreement is a contract under which two or more businesspeople carry out a business activity for profit. Partnerships may be used to operate a very simple business enterprise or carry out complex transactions in the capital markets. At Dunnington, Bartholow & Miller LLP we are ready to assist our clients with sound and reliable legal advice on recommendations for negotiation of their partnership agreements. Here are five critical things to focus on:

  1. The law that governs a partnership agreement.  The state where the partnership agreement has been executed controls the duties the partners owe each other and whether one or more partners have limited liability for the partnership’s obligations. However, the partnership agreement may contain provisions that prevent this general rule from applying.
  2. What kind of partner do you want to be?  A general partnership provides for only one kind of partner and those partners cannot be shielded from liability for the partnership’s obligations. In contrast, a limited partnership provides that certain limited partners are not liable for the partnership’s obligations. However a limited partner can only be shielded from these liabilities if that partner is not involved in managing the partnership’s affairs. The positives and negatives of assuming either role should be assessed adequately before executing a partnership agreement. In addition, several states allow limited liability partnerships in which all general partners may have limited liability for the partnership’s obligations.
  3. Everyone is replaceable and everyone can leave.  In most states, absent a specific provision to the contrary in the partnership agreement, every partner can dissociate from the partnership and retrieve their investment. However partners may want to modify the default provision by including in the partnership agreements a mechanism allowing a partner that is not interested in continuing to retrieve their invested capital and leave at a fixed time.
  4. How to be sure you get your fair share.  In most states, there are default rules establishing to what extent each partner shares in the profit and losses of the partnership. In most situations all partners share in the profits and losses of the partnership equally. However in some situations partners may share proportion to the value of their contributions. Given that partners may modify those default rules in their partnership agreement, a prospective partner should examine the relevant provisions of that document carefully and verify that the share of profits and liabilities assigned has been determined fairly.
  5. Keeping partners in check.  Partners that have a right to manage a partnership cannot be deprived of that right easily unless the partnership agreement spells out in detail a mechanism to achieve this result. One example is the removal of the managing partner upon the occurrence of certain circumstances. Clearly defining these procedures can facilitate the resolution of possible conflicts among partners with different ideas about the partnership’s long-term goals.

At Dunnington, Bartholow & Miller LLP we are a full-service firm ready to provide reliable legal advice on the most appropriate provisions to be included in a partnership agreement to protect a business owner’s personal interest in any partnership formed for any business purpose.

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