Before launching a business with one or more partners, it’s important that everyone involved gain a clear understanding of how the business will operate. Who will assume the many responsibilities involved? How much of the business will each partner own? How will future profits be shared?

The best way to come to an agreement on these issues and others that could impact your business in the future is to ask the right questions in advance and memorialize your thoughts in a written partnership agreement.

Quite simply, a partnership agreement establishes a foundation for the successful operation of a business. When establishing this foundation, you and your partners will determine who will do what in the foreseeable future, how the business will be funded, how profits and losses will be allocated, whether you plan to welcome new partners into ownership in the future and how partners will be handled should they decide to leave the business.

Failing to go through the work involved in preparing an agreement can result in everyone assuming that all partners are in sync on important issues when some may indeed have very different views on how the business is going to operate. Misunderstandings of this sort can result in conflicts that may be very hard to resolve. While every partnership will experience its share of difficulties and disagreements, a written partnership agreement will help the business address these challenges and find clarity when disagreements do come along.

Unless a business with multiple owners incorporates, it will be classified as a general partnership in which the partners are each fully liable for the company’s debts. Partners report their share of company profits and losses on their personal tax returns and pay income tax at prevailing personal tax rates. If a business with multiple owners chooses to incorporate, it will have its own legal identity, and partners will receive shares in the corporation. Partnerships that incorporate can elect to be taxed as a C-Corporation, in which partners are salaried employees and the business pays corporate income taxes. Businesses with multiple owners can also incorporate as S-Corps, where income passes through to the owners and must be reported on their individual income tax returns.

In addition to the name of the business, a description of the business and contact information for the business and its owners, a Partnership Agreement typically includes the following:

• Ownership Information – Typically, these agreements will spell out what percentage of the business each partner will own.
• Capital Investment – The amount of cash or other property each partner will contribute to start and operate the business is usually described in the partnership agreement. It is also common to outline each partner’s obligation should the business need additional cash in the future. In cases where one or more partners are investing their time or talent to start or operate the business when others may be investing only cash, this should be described in the agreement.
• Distribution of Profits – To avoid confusion or conflicts down the road, it is important that the partnership agreement describe how profits and losses will be allocated to the partners. It is also important to cover how partners will be repaid for their initial contributions and the way in which future profits will be distributed.
• Decision Making – Will partners weigh in on important matters based on their percentage of ownership or will all partners have an equal say? Whether you and your partners agree that decisions must be unanimous or that a majority should rule, detailing what matters must come before the owners and how those decisions should be made will help avoid possible conflicts in the future.
• Death or Disability – It is very important that your agreement define what you want to happen if a partner dies or becomes unable to remain involved in the business. Will other partners be required to purchase that partner’s ownership interest and if so, how will the departing partner’s responsibilities, duties or decision-making rights be handled going forward? While these may seem like long-term issues, they should be addressed up front and included in your partnership agreement.
• Planning for the Future – Another area that should be addressed is the procedure to follow when an existing owner wants to leave the partnership or when adding new partners. Determining how profits, losses, decision-making authority and operational responsibilities will be allocated in advance will make life much easier for everyone should these developments occur.

While all partnerships must involve a for-profit business consisting of two or more people, different types of partnerships offer various ways of distributing liability. For this reason and because these documents can play such an integral part in the future of a small business, many business owners have engaged Regan Law to help with this process.