I was sitting at a local coffee shop in my neighborhood the other day and I overheard two people discussing a new business they wanted to get off the ground. They were talking strategy and contracts and who was going to be in charge of what and I was tempted to jump in, but I stopped short when I heard the words “partnership agreement.”
From that point on, it sounded like they were on the right track. But too often I’ve heard stories where the opposite was true…
A Familiar Story
There once were two friends who wanted to go into business with each other. We’ll call them Tom and Frank. Frank had this really clever idea for a new business and Tom was eager to “be his own boss” and quit his mundane 9-to-5 job. For weeks they plotted how the new business might work, where they would find investors and customers, and how much money they might make.
Over the course of a few months, Tom made a significant investment in this new business: he cashed in a retirement IRA for capital funds (nearly $10,000!), spent most of his free time working on a solid business plan and investment proposal from the random thoughts and notes Frank offered, and even gave notice at his job when he felt the new business ready to take off.
Of course, Tom and Frank had been encouraged by friends and family to hire an attorney and get a limited partnership agreement in writing to protect everyone’s interest. And they did just that, though the attorney seemed to be dragging his feet and not promptly returning phone calls. The business idea, however, was picking up steam and Tom and Frank were eager to jump in headfirst.
More weeks passed, and now Tom’s eagerness was replaced with worry: worry about when new money would be coming in, worry over where his capital investment had gone, worry over how he would pay for his mortgage next month. The attorney they’d hired as now MIA and Frank was handling negotiations with investors and franchisees on his own. Suddenly, Tom felt on the outside looking in as his involvement with the new company dissipated.
What You Need at the Start
When it comes to a partnership agreement, these contracts can be as simple or as complicated as you want to make them. I usually opt for somewhere down the middle, making sure wording is straight-forward and expectations are realistic. Mapping it all out in a single document keeps people honest and (literally) on the same page.
As you work with a qualified attorney to draft your partnership agreement, consider these important issues:
- Who is making the decisions for your business? Do all partners have an equal vote or is one person elected leader for a set period of time?
- How much of your own money will you contribute? What if the company needs more invested funds? If one partner is the “money guy” and the other is contributing work and ideas, you need to make it clear who’s doing what and what each person gets out of the deal.
- Who draws a salary and when? Sure employees get paid regularly, but not all business owners do. You’ll want to spell that out, so everyone knows when and where funds will be allocated.
- What if a partner dies or is disabled? I mentioned this in a previous column, and there’s often quite a legal mess if it’s not addressed properly.
- What happens at the end? No one wants to think about it when they’re dreaming big and hopeful for the future, but who gets what when the business partnership comes to an end? It’s vital you address that in writing.
Where do you start? Normally, I shy away from DIY documents but there are some great introductory articles and paperwork you can check out at several online sites like Legal Zoom or Rocket Lawyer. I recommend educating yourself about what you need in your partnership agreement – including which type of partnership you need – and start filling out some of those documents. Then, get with a business attorney, and have them review the agreement before it’s official. It’ll cost you a little bit at the start but it’ll be worth the peace of mind knowing you and your rights are protected in this new venture.
Do you need a Partnership Agreement? Want me or my team to look over your partnership agreement? Just give us a call at 214-974-8940 and we’ll be happy to help.
ATTORNEY CHRIS PARVIN is Board Certified in Estate Planning & Probate Law by the Texas Board of Legal Specialization. Mr. Parvin is the Managing Partner of the Dallas, Texas law firm of Parvin Law Group, P.C. and serves as an Adjunct Professor of Law at Texas A&M University School of Law. Mr. Parvin can be reached by email at [email protected].
Parvin Law Group, P.C. is a Concierge Law Firm in Dallas, Texas with attorneys practicing law in the fields of Estate Planning, Probate, Business Law and Family Law.