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The Importance Of Well-Drafted Partnership Agreements

by | Nov 25, 2023

As you know, most business partnerships start out on a positive note. Both parties are excited about the future and full of enthusiasm for what they expect their partnership to look and be like. However, as anyone who has been involved in a business knows, it’s only a matter of time before there is a bump in the road. Whether or not that first bump turns into a full-blown partnership dispute depends, in large part, on the partnership agreement that was in place. 

A partnership agreement is a legal document that lays out the role of each partner in the business, how much of the business each partner owns, instructions on how shares should be handled, rules about partner actions, and what should happen in certain scenarios such as the death or exit of a partner. 

If any part of the agreement (or the whole thing) is unclear, or wasn’t clearly understood by either or both parties, there is room for misinterpretation, and it paves the way for conflicts to arise over partner actions, rights, and duties. Here are a few specific reasons why having a well-drafted partnership agreement is so important!

Well-Drafted Business Partnership Agreements Reduce The Likelihood Of Litigation

Partners in a business are bound to disagree at some point, whether that disagreement involves the actions of business owners/managers/other partners, or the direction of the company, or something else. Disagreeing isn’t the problem – it’s a natural part of any business relationship – but how the disagreement is resolved can be a problem if the partnership agreement is ambiguous. If neither side can consult the partnership agreement with confidence to support their reasoning, and/or if the partnership agreement doesn’t contain well-defined dispute resolution mechanisms like mediation or arbitration, then the parties may have to court in order to reach a resolution. 

Litigation is an expensive undertaking that’s highly disruptive for any company. Depending on how long it takes – litigation may take months or years – both sides are looking at tens of thousands of dollars in legal fees and court costs. Partners will have to take time away from focusing on the business to attend depositions, meet with attorneys, gather paperwork, and do other things related to their case. 

This means business growth will likely stagnate, if not suffer. Litigation also has the potential to damage a business’s reputation with clients and/or the public, which can tank stock value and sales. Overall, it’s best avoided – sometimes it’s the only option, but if a partnership agreement can prevent litigation (which, it is much more likely to if drafted carefully) all the better.

Well-Drafted Business Partnership Agreements Provide For Business Stability In Unstable Times

No one can predict the future, but the smart ones can be prepared for it. If an unexpected event occurs and the partnership agreement doesn’t make provisions for that type of occurrence, or is unclear about what should happen if those types of events should occur, it can throw the whole business into chaos. 

For example, say a partner is found guilty of embezzlement or fraud, or is killed in a car accident, or decides that they want to leave the partnership. A well-drafted partnership agreement will spell out exactly what should happen to that partner’s responsibilities and shares, including valuation methods, the division of assets, the buyout process, and more. 

Or say regulatory laws change – the attorney who drafted the partnership agreement can update it to ensure that the business remains compliant and operates within the bounds of the law to avoid criminal and financial penalties.

Well-Drafted Business Partnership Agreements Make Business Operations Smoother

In order for a group project to go well, all of the people involved have to know what their role is in the project, and what part of the final product they are responsible for. If they don’t, some people might assume that others will take care of their part or take on an unnecessary part, and the outcome may be messy, with some parts going unattended and people disgruntled with each other. 

It’s the same in a business partnership. Without clearly defined positions that state who and how decisions can be made on behalf of the business, business partners are much more likely to end up squabbling amongst themselves about who should be doing what, or step on each other’s toes, or drop balls that mean the business doesn’t run as intended. A strong partnership agreement will make sure that all parts of a business’s operation are accounted for

A Well-Drafted Business Partnership Agreement Should Be Drafted And Reviewed Regularly By An Experienced Attorney

Because a partnership agreement is so important and has so much to do with how smooth your business’s path to success ends up being, you shouldn’t try to draft the partnership agreement yourself, or use an online service, or borrow an example from another business. If you’re serious about your business’s success, you need to work with an experienced corporate attorney who focuses on partnership issues and who can help you create (or review and update) an agreement that is personalized to your unique business goals. 

At Pitcoff Law Group, we pride ourselves on making legal, simple. We specialize in business litigation and corporate transactional matters; we work with startups, family-owned businesses, mid-sized businesses, and large corporations and have experience in a wide range of issues, including partnership agreements and disputes. One of our main practice areas is resolving partnership disputes; because we’ve been able to settle multi-million dollar disputes without litigation, we know what it takes to prevent these disputes from occurring in the first place. 

Whether you are starting a partnership or are already running into problems with your current partner, you can trust us to work one-on-one with you to curate the best possible solution. Call Pitcoff Law Group today to see if you are eligible for a free consultation.