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The importance of a clear business partnership agreement

Hubbard Snitchler & Parzianello

What do these pairs have in common: Lennon and McCartney, Sonny and Cher, Saverin and Zuckerberg, Kraft and Starbucks? Answer: They are all failed business partnerships which ended acrimoniously.

If you consider going into business with someone else, you must begin your relationship by setting clear ground rules. With some research suggesting 70% of business partnerships end in tears, you need to let your natural pessimist shine through when drawing up agreements. Failed alliances could end in costly business litigation if you did not provide for all such situations in your contract.

There are three types of partnership to consider:

  • A general partnership: All partners are active and liable for any debt or lawsuits.
  • A limited partnership: Some partners are active and liable for any debt or lawsuits; these are called general partners. Others are not active or liable for debt or lawsuits; these are called limited partners.
  • A limited liability partnership: All partners can be active. No partners are liable for debt or lawsuits.

So, once you have decided what sort of partnership you want to be in and what type of partner each of you wants to be, you can proceed to create your partnership agreement. Consider what investment you will put into the company, what role each person will fulfill and what rewards each partner will take out of the company.

Assume you will be one of the 70% of partnerships that do not last forever and include details of how you can end it, either because things are failing or because one of you wants to move on. A well-written business partnership agreement will require the help of an experienced business law attorney. The better you define things, the more likely you will be one of the 30% of partnerships that last.

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