The beginning of a business partnership is an extremely exciting time, but it is also a little like the beginning of a romantic relationship. Both you and the other party are likely excited about the skills you will each bring to the table, and you may only envision good things for the future. Although the hope is always that partnerships are successful, disputes still arise. You could find yourself regretting certain decisions, or reflecting on past mistakes if you do not first take some important factors into consideration before making the partnership official.

Percentage of Ownership

In a partnership, each partner will own a percentage of the business. The percentage each partner is entitled to is typically dependent on the amount and value they contributed to the business before officially starting the enterprise. For example, one partner may have invested a significant amount of money into the business but has no plans to contribute to its daily operations. The other partner, on the other hand, may not contribute any money to the business but may put in the daily work to ensure it is a success.

There is no formal standard for what contributions are considered of greater value than others when determining the percentage of ownership. A partnership agreement can outline the percentage each partner owns of the business in the event that a dispute arises in the future.

Allocating Profits and Losses

Just as partners must agree before opening the business what percentage each party owns, you must also determine the percentage of profits and losses that each partner is allocated. Often, the allocation of profits and losses among partners is determined by the percentage of ownership each partner has a right to, but that is not always the case. If you wish to allocate profits and losses based on other factors, you must indicate this in your partnership agreement or they will be allocated according to the percentage of ownership.

You must also determine if partners will be allowed to take draws. A draw is an allocation of profits from the business before they are distributed among all partners. It is important to determine this right from the beginning, as financial disputes are often the downfall of partnerships.

Binding the Company

Unless otherwise specified, any partner can bind the company to certain obligations without consent from the other partners. This may sound fine until one partner buys an extravagant purchase or makes a significant investment without informing the other partners. Sometimes when this happens, it negatively affects the business because the company could not afford it. Or, other partners may have wanted to spend certain funds on other projects or endeavors. 

When one partner binds the company to certain obligations, it can result in a dispute that impacts the business negatively. It is important to clarify certain requirements partners must fulfill before they bind the company to financial obligations, such as obtaining the consent of other partners.

The Decision-Making Process

Again, at the beginning of a partnership, you may agree with everything your soon-to-be partner or partners suggest. Decisions may be made quickly and with little argument. You cannot expect it to remain this way forever. Disagreements are common in business, even between partners, and they can also offer different points of view that actually benefit the business. However, when a decision must be made and partners cannot come to an agreement about it, the situation can become so deteriorated it results in the failure of the business.

To avoid this from occurring, it is important to establish the process for making decisions early on. Before even officially opening the business is usually the best time to outline the process for making decisions. When determining the steps in the decision-making process, it is also important to determine which partner will have the most responsibility when making decisions so discussions and disputes can remain focused.

Leaving the Partnership

Like the beginning of a romantic relationship, it is sometimes difficult to even imagine at the very beginning that things may fall apart. However, over time, the partners may become involved in a dispute about the future of the business. Or, a disagreement may arise that threatens the partnership. In these situations, one or multiple partners may decide to leave the business. When they do, all of the partners will be left wondering what to do with that individual’s share. A partner may also unwillingly leave the business if they suddenly pass away.

In all of these situations, it is essential to have a plan and agreement about what to do when the business loses a partner. A buy/sell agreement is always important, as it will establish a method for evaluating partnership interest, and for allowing individual partners or the partnership as a whole to buy that interest back from the leaving partner.

Dispute Resolution

Regardless of how friendly the partners are at the beginning of the partnership, disputes are bound to arise. A partnership agreement can help prevent these disputes from occurring, but it is difficult to cover every circumstance. The partnership agreement should outline how disputes will be resolved, and preferably before entering litigation. Litigation is a very expensive and time-consuming process, and it can cause significant harm to the business. However, a partnership agreement can specify that partners must go through mediation or another form of dispute resolution so disagreements are settled quickly and efficiently.

Our Business Lawyer in Santa Monica Can Help You Start Your Partnership Right

It is true that many issues can arise between the partners of a business, but they should not stop you from entering into a promising business venture. At Klein Law, our skilled Santa Monica business lawyer can draft a partnership agreement that will minimize disputes, and outline how you and the other partners will run your business in the future. Call us today at (310) 295-2261 or contact us online to schedule a consultation and to learn more about how we can help your partnership get started on the right foot.