Everything You Need to Know About Business Partnerships.

Before you think about getting another business partner, Find out what this law expert will say about the dangers of partnerships.

You’ll be amazed by the number of customers I meet who need to learn their partner’s background and method of conducting business or the goals of the relationship. They enter into the partnership so quickly that they need to gain this basic knowledge about their partner.

Here are a few things to think about before signing any partnership agreement:

  • Of course, you should only enter into business with people you are confident in. Check out all your business transactions regardless of whether they are contractors, tenants, or others. This may involve conducting background checks or asking for personal references. This is particularly true for any partner in a business partner(s) as it is the best way to ensure security when you join the partnership.
  • Discuss potential issues before they become problems. Discuss worst-case scenarios. If your partner isn’t ready to discuss this in any way, it’s because you’re not the right partner.
  • Make sure you read and comprehend your partnership documents before signing them. A professional lawyer can assist you in identifying possible problems and offer solutions; however, you and the business partner(s) must be the sole owners of the partnership agreement and provide complete knowledge of the rules it will apply to your company.
  • You may want to seek separate counsel if you’re using the exact attorney for your partner(s) who is raising issues.

If you live in a community property state, have every business partner’s spouse sign the partnership/operating agreement and any amendments. The spouse presumably has an ownership interest in the business, and you want them to agree to the provisions of the partnership/operating agreement. This is crucial regarding the company’s valuation when you buy out an individual partner when there is a divorce.

Setting Up the Partnership

Making the partnership agreement and creating the appropriate structure or entity of the company are two essential steps to take in forming a partnership. Understanding how your company will be run is crucial in drafting the partnership agreement and the conditions. While the list of elements to take into consideration in a good partnership agreement is not definite- every partnership is unique–I’ve narrowed the list down to my most important 10:

  1. Partners are responsible for signing authorizations. Be aware of what the managers and employees of the company can perform on behalf of the business.
  2. The responsibilities and duties of each partner. A description of each partner’s commitment and duties should be given to ensure that each partner knows what they can expect from the other. Additionally, there should be specific consequences for partners not fulfilling their obligations.
  3. Capital contributions. What amount of money, time, and assets are all partners contributing? This includes initial grants and additional funds required for the company’s operation.
  4. Rights to profit, distributions, and compensation for losses. Any right of partners to receive mandatory or discretionary distributions, including the return of any or all of their contributions, must be explicitly and precisely stated within the agreement of the partnership.
  5. Unanimous vote requirements. What decisions or events require a majority vote of your business partners? You, together with your business partners, must determine the procedure in concert at the beginning.
  6. Exit strategy or dissolution. The partnership agreement should state the specific dates when the partnership will disband and the business end. The business idea and the model aren’t suited to answer this question. For instance, when it comes to the case of a real estate transaction, it’s essential to set the timeframe and potential trigger events that could result in either selling the property or purchasing one of the parties if they decide not to stay in the long run.
  7. A buy-sell clause or a typical buy-sell arrangement. This kind of agreement covers significant changes to the partnership agreement. For instance, what happens if one partner involuntarily or voluntarily quits the partnership? What happens if they are bought out? How do you proceed if you decide to transfer ownership stake–does your business partner have the right to purchase it before your transfer over to a third party? What happens if your business associate dies? Or are they divorced? Or file for bankruptcy? Or simply is looking to retire?
  8. Expulsion provisions. Take note of this provision as an iron fist. The benefit of this clause is that it allows you to make it clear in writing when the partner is removed from the company. For instance, you and your co-workers may agree that the other partner could be pushed out if a partner isn’t performing their duties. However, ensure that your well-deserved three-week trip to Tahiti does not trigger your expulsion rights.
  9. Noncompete clause. For instance, you, along with the business partner(s), could decide that if one of them quits the business, they will not be able to start a new business in a different location or join a competing company within a specific distance and for a specified duration of time.
  10. Diverse clauses. Examples include a clause to pay attorney’s fees for the non-breaching party in case they prevail in a lawsuit, mediation or arbitration clause binding, so you don’t need to appear in courts if it isn’t your need to and the choice of venue or law clause that defines the states law is applied in a dispute between two parties and the location where the dispute will be resolved.

Be sure to meet with you and your partner(s) and discuss your best and worst-case scenarios. Find a trustworthy and honest lawyer to represent the business or have each partner engage an attorney to review the documents of your partnership and discuss the issues above and the specific and individual requirements of your partners’ particular circumstances.

The Best Entity for a Partnership

Most of the time, a limited liability corporation (LLC) is the most effective structure for partnerships. There are certain instances where a corporation or limited partnership may be appropriate, but they are the exception, not the norm. To lower taxes, it’s common to include each member’s share in the LLC controlled in the S corporation.

There are three main reasons the LLC is the ideal partner for partnerships. Let’s take a look at the three reasons:

  1. limited liability protection protects you from your spouse’s actions (and, in turn, vice versa). Without it, you are subject to unlimited liability as a vicarious liability.
  2. The operating agreement, the first minutes, and the formation documents are excellent documents for defining the partnership’s terms.
  3. The flexibility of an LLC allows for a better distribution of profits, losses and capital, enabling the partners to conduct their tax planning after receiving their share of the profits.

Partnership Management Tips

Once all the paperwork has been completed, and you’re a partner You must follow specific steps to ensure a successful partnership.

The following are the top 3 behaviours that can help a partnership succeed:

  1. Documentation and communication. As the business partnership evolves, record and document anything contrary to your initial partnership/operating agreement. A good partnership/working agreement will allow for revisions due to changing circumstances, but these should always be in writing and signed by each business partner.
  2. Get involved in your business. Never think that the partnership will be a simple operation. If you aren’t constantly in contact with your partners may be in the middle of a conflict. Be aware of your obligations and responsibilities, as well as your partner’s expectations or clarify their expectations.
  3. Tax deposits and bookkeeping. Refrain from cutting corners with accounting and finance. It is the vitality of your company and will determine how and when your profits are divided. Making sure that your tax payments are received on time and in the appropriate quantities is also a key element of effective tax planning for your partnership. Avoid “phantom income,” which is the partnership’s income that is recorded on paper but not accompanied by similar distributions. This could cause havoc on each partner’s tax returns in the absence of proper bookkeeping and planning.

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