Home Venture Q and A Partnership Agreements Entrepreneurial Insight by Susan Schreter

Partnership Agreements Entrepreneurial Insight by Susan Schreter

Special to Seattle24x7

Q. Awhile back, you wrote about friends going into business together.  You mentioned partnership agreements. I’m going into business with a friend and want to protect our friendship.  What format is best and where can I get one?

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A. Oil and financial baron John D. Rockefeller is credited with saying that “A friendship founded on business is better than a business founded on friendship.”

While there are so many instances of friends becoming successful business owners together, Rockefeller’s sentiment underscores the practical point that going into business with a friend is a tricky business indeed.

I’d like to say that a partnership agreement can protect your friendship but it can’t.    This treasured asset can only flourish with dedicated hearts.

What a partnership agreement can do is ensure all partners will be treated in a consistent way in good times and bad.  The best of agreements lay out in straightforward terms how profits, assets, debts and other responsibilities will be shared while you are in business together and if one of you decides to abandon the entrepreneurial cause – for any reason.

While it is fun for friends to fantasize about trade logos, new products and first customers, the process of constructing a partnership agreement gives entrepreneurs the discipline to talk through the nitty-gritty details of how decisions will be made, what money can be taken out of the business, how new partners can invest, and what happens if one partner dies or becomes disabled.

So where can you get an agreement?  The Kauffman Foundation (www.kauffman.org) offers a good example of a basic, though extensive partnership agreement.  Its primary value, I believe, is to familiarize entrepreneurs with a wide range of issues that influence how partnerships are organized and managed.  It’s a worthwhile read.

There are also a number of online sources that sell what I call “McAgreements.”  These cookie-cutter documents prompt partners to fill in the blanks covering the basic terms of partnership organization, distribution of profits and losses, and what basic steps will be taken to buy or sell partnership interests.

Because every business is different, I encourage startup entrepreneurs to spend the money to get a customized agreement from a lawyer.   If for example, you and your friend plan to open a sports bar together, the partnership agreement would be quite different than an agreement governing two friends writing movie scripts together on weekends.

Another reason to consult professional advisors is to avoid tax surprises.  If one partner contributes cash and another contributes assets or intellectual property, then the IRS will pay attention to how non-cash property was valued at the time of partnership organization.   Also, there are special tax considerations for selling or transferring an interest in a 50-50 partnership.

I’m frequently asked how entrepreneurs should select legal counsel.  First, it’s worth it to find a specialist who routinely serves young, growth-oriented companies.  Since most business attorneys charge the same rates, you get more value by working with an attorney who understands the nuances of state partnership law.   For example, should spouses of partners sign partnership agreements to demonstrate agreement with partnership sale provisions?  Possibly.  A good lawyer will know if one partner’s potential divorce could unravel a partnership based in a community property state.

Second, choose an attorney who is patient and answers questions fully without intimidation or too much legal speak.  Good lawyers make good teachers.  The more you know, the better your partnership.  If the lawyer dismisses your questions, it’s time to dismiss your lawyer.  Just keep up the pursuit until your partnership agreement is in place! [24×7]

Build the business of your dreams.  Send your fundraising and small business management questions to susan@insideentrepreneurship.com.