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Better Safe Than Sorry

Protect yourself and your business with a partnership agreement.

Starting a business with a partner? It may be difficult to talk about problems during your honeymoon stage, but that's exactly when you should. A written partnership agreement helps guide you when questions arise.

According to W. Thurston Debnam Jr., a partner with Smith, Debnam, Narron, Wyche, Story & Myers LLP, a law firm in Raleigh, North Carolina, a partnership agreement should answer the following questions:

  • What is each partner's investment? Is one investing cash and the other energy? Do any of the partners own equipment that you'll use in the business, and does that fact deserve consideration as part of the start-up investment?
  • What are the responsibilities and duties of each partner? Be specific about each partner's role in the day-to-day operations of the company.
  • If a partner becomes disabled, how long will he or she get a share of the profits? If a partner dies, what happens to that share? A good way to deal with this issue: life insurance on all partners.
  • Can the partners have other outside partnership interests? In particular, can interest be in those similar or competitive businesses?
  • What will you do if one partner wants to withdraw? Typically, you'll set up a buyout agreement, but it's a very good idea to decide on the terms before the situation arises. You'll also want to include a noncompete covenant.
  • How will you restrict partnership-interest transfers? Can a partner transfer his or her ownership to anyone, or can you limit that transfer? This means the remaining partners won't find themselves in partnership with someone they object to. This is frequently used to protect the business in the event that one of the partners gets a divorce and his interest becomes a part of the divorce settlement.
  • Can a partner pledge his or her interest as collateral for a loan?
  • Are additional contributions mandatory? If the business needs capital in the future, are partners required to make capital contributions?
  • How will conflicts be resolved? Most often, an arbitrator is used.

Debnam recommends that every business partnership-regardless of the relationship of the individuals-begin with a written agreement. "It ensures that the partners have the same vision," he says.

But there's another reason for a partnership agreement. "Poorly drawn agreements keep litigation attorneys in business," Debnam notes. "The best reason to have a good agreement is to avoid the legal fees when you have a meltdown."


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This article was originally published in the August 2000 print edition of Entrepreneur with the headline: Better Safe Than Sorry.

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