Ten Mistakes in Your Partnership Agreement

A Few Easy Steps to Avoid Future Headache

Spring is in the air! Temperatures are warming. Flowers are blooming. And business opportunities are eagerly coming out of hibernation. Longer days and sunshine bring about renewed interest in business, and with that comes many conversations about combinations of skills, resources, and capital.

These conversations and the partnerships that flow from them are wonderful steps toward a prosperous future. But if not handled correctly, they can be a source of frustration (or worse) for years to come.

A new business relationship is just like any other personal relationship, only with the complicating factor of money in the midst. And like any new love, it’s tempting to think that things will be easy and perfect forever. After all, you wouldn’t be starting a relationship if you didn’t think it would go well. But relationships take effort and understanding. Business relationships (whether partnerships, LLCs, or corporations) are no different.

As all of my clients have heard me preach, most business disputes do NOT happen because one person was out to get the other. Most happen because:

  • we didn’t talk about something;
  • we talked about something and forgot what we said; or
  • we talked about something and had completely different impressions of what it meant

So to avoid future dispute, and save our relationship, we take a valuable step and write down the terms of our partnership. Whether your terms are couched in a partnership agreement, operating agreement, shareholders agreement, or something else, here are 10 often overlooked areas that can cause big problems for the future of your relationship.

  1. Not defining the purpose of the company. If we don’t know what we’re doing, how do we do know if we’re doing it well and more importantly, how do we know if we’re competing with or undermining the company?
  2. Not addressing management and who minds which part of the store. How are decisions made? Do we collaborate on everything, some things, or do we trust that each person is responsible for certain aspects of the business?
  3. Not accounting for whether and when the partners need income from this business. Is our business one that requires constant reinvestment of income into operations, and if so,
    do we each have enough to meet personal living expenses from other sources?
  4. Not planning for how to exit the business one day. Never start a business without a plan to get out. If you don’t,
    things can get messy as the unplanned departure of a partner is disruptive to say the least. On the other side, being trapped in a business with transfer restrictions that were not carefully planned is no picnic either.
  5. Not having a method to deal with disagreements. At some point we will not see eye to eye on something. What do we do then?
  6. Not having a method to deal with bad behavior. What do we do if someone does something so bad there’s no possibility of being able to trust them again?
  7. Not planning for how adding future partners can dilute your share of the business. You might be the majority owner on Day One, but when you add an investor or partner on Day One Thousand, are you still in command? Does the business need you to be?
  8. Not planning for taxes. Your cash flows and your profits aren’t the same thing. But your tax planning helps increase how much of your top line makes it to the bottom, for both the business and you.
  9. Not addressing distributions made in liquidation of the business. It’s fairly common for one partner to be the money person and one to be
    the skill person investing sweat equity. They may even agree to 50-50 ownership. But if the business closes in a year, those partners would each receive 50% of the business assets, even if those assets are largely just the cash the money partner put in.
  10. Not writing an agreement. Handshakes are great for hellos, but we should leave them at that. Like I said, most contracts aren’t breached because one person was out to get the other. A handshake and a memory will not help with those 3 dispute causers I mentioned above.

With these ten issues resolved, you’re well on your way to a happy and prosperous relationship!