A well written agreement between you and your business partners is critical in protecting your business, yourself and your family, and your partners and their families. The business and tax attorneys at San Luis Obispo’s Toews Law Group, Inc. have vast knowledge and experience in drafting well written partnership agreements.
No matter how much you may trust your business partner today it is not uncommon for disputes to arise and sealing the deal with a handshake is not in anyone’s best interest when it does.. Human memory is not reliable and, if a partner should die or become unable to fulfill his or her obligations, a verbal agreement about what happens to the business in those circumstances has no standing if the injured partner’s family or heirs contests the verbal agreement.
California’s Revised Uniform Partnership Act (RUPA) sets the rules for business partnerships in the absence of a written agreement. Pursuant to RUPA, each partner has an equal share in the profits and losses of the partnership, including taxes and other liabilities, and an equal right to manage the business. The law is complex, and it is critical for a written partnership agreement to cover all aspects of partnership responsibilities and shares of the business that fall under the auspices of RUPA.
A partnership agreement structures the relationships between partners in the best interest of business and each partner. The agreement spells out the rights and responsibilities of each partner, the shares of profits, losses and other liabilities of each partner, what happens of any partner wants to sell out, dies or is incapacitated. A partnership agreement can include how to resolve conflicts and disagreements.
What a partnership agreement covers
Here is an example of the basic major areas that most partnership agreements should, at minimum, cover. There may be additional areas, depending on the business and other conditions the partners have agreed upon. It is important to take detailed notes during any meetings that lead up to a partnership agreement so that all matters that were discussed are addressed in the partnership agreement.
- A name for the partnership. Last names are common, such as “Jones and Smith,” or you can register a fictitious business name in the county you are doing business.
- What each partner is contributing to the business. Who is contributing cash, property, services, or other contributions before the business opens?
- What percentage of the business does each partner own?
- How are profits, losses, draws allocated?
- When will profits be distributed, losses assessed or draws paid?
- Will partners receive salaries and how much?
- What authority does each partner have to bind the business to any kind of agreement without the other partners’ knowledge or consent?
- What is the process for entering into any binding agreement? Must all or a majority of partners agree?
- If a partner does not have the authority to bind the business, but does so anyway, what recourse do the other partners have?
- How are management duties allocated to each partner? For example, who will oversee accounting, who oversees employees, who is responsible for sales?
- How are new partners admitted to the partnership?
- How does one partner sell his or her interest?
- What happens when a partner dies or becomes incapacitated, or wants to retire?
- How are disputes about the business or other aspects of the partnership resolved?
- How is tax liability handled?
A well written partnership agreement can also enable potential partners to start a business without incurring the expense and logistics of forming a California corporation or limited liability company. Toews Law Group, Inc. can also help partners identify the best business entity for current and future operations.
There are tax benefits attached to each kind of business entity and business and tax attorneys at San Luis Obispo’s Toews Law Group, Inc., take the time with you to make sure your business is set up for the best legal structure for the most taxation benefits, or to restructur