For many entrepreneurs, a partnership makes more sense than going solo. Yet with partners comes a slew of issues to consider, including how to overcome voting deadlock, whether votes should be based on financial contribution and what happens when somebody wants out. Read on to find out how a partnership agreement works and what you should make sure yours includes.
A general partnership is an association of two or more people formed under the partnership law of a state or other jurisdiction to operate as co-owners of a business. The association is created by a consensual agreement of the partners, which may be written, oral or implied. Of course, a written agreement is immensely preferable.
In the absence of an agreement to the contrary, the partners have equal rights and authority to participate in managing the business. Generally, each partner has one, equal vote when matters need to be decided. When the contribution of capital to a partnership is uneven, typically the votes are weighted in accordance with the respective financial interests. However, partners with larger financial interests usually will favor equal voting rights among the partners.
When there are several partners or the partnership business activities are numerous or complex, the partnership agreement may create classes of partners with different voting and financial rights. The partners may agree to create senior and junior partners, designate a managing partner, or appoint a management committee with specified duties and responsibilities. Day-to-day decision-making may be delegated to such a managing partner or committee, but major decisions still require a vote of the partners.
Unless otherwise agreed, differences arising on ordinary matters are decided by majority vote of the partners. Any act contrary to the agreement or outside the ordinary course of the business requires the unanimous consent of the partners.
The partnership agreement should anticipate the possibility of a voting deadlock and outline provisions for resolving the impasse. The agreement may provide for independent arbitration of deadlocked decisions or that a buy-out clause be triggered so that one partner may resolve a deadlock by purchasing the interest of another partner.
When all else fails, a partner may always exercise the power granted by the partnership law of most jurisdictions to dissolve the partnership at any time.
Dissolving the Partnership
In most states, the law of partnerships provides that, unless the agreement indicates otherwise, partnerships are dissolved--or a partner may be dissociated from the partnership--when specified events occur. These usually include death, expulsion or bankruptcy of a partner; impossibility to conduct partnership business; or a decree of dissolution by a court. Dissolution doesn't mean that the partnership ceases business, but that the relationship between the partners is terminated.
If the partnership plans to go out of business, the next step is called winding up. The business, property and assets of the partnership are disposed of in accordance with the partners' agreement. However, unless prohibited by a court judgment or the agreement, the partners under the law of some states may continue the partnership by following the provisions of the agreement with respect to the calculation and payment of the dissociating partner's interest. In other states, the dissociating partner has the right to demand that the partnership be wound up.
Partners own an interest in the partnership, but not in the property and assets owned by the partnership. Thus, a partner can only sell or transfer his or her economic interest in the partnership--i.e., the right to profits, losses and distributions. Usually, the partnership agreement contains restrictions on a partner's right to sell or transfer. These provisions are intended to protect the remaining partners while allowing the dissociating partner to be fairly compensated for his or her interest. Partnership agreements commonly give the remaining partners a right of first refusal to buy out the dissociating partner.
The provisions of partnership agreements that govern the above and other aspects of a business relationship vary widely and should be thought out in advance and memorialized in a written agreement. In the absence of such an agreement, the default rules are set forth in the applicable partnership law.