For many Californians, owning a business fulfills a lifelong dream. Starting a new company with a close friend or family member is an exciting time as partners work together to overcome the many challenges startups face.
While California does not require partnerships to have a written agreement, it is an avoidable mistake not to draft a document. The contract should spell out how to run the business, the roles and responsibilities of two or more partners and what happens if one partner dies or decides to leave.
Items to include in the agreement
Partnerships are common in the Golden State. But these business entities can be highly complex depending upon the business and how many partners are involved. Drafting a contract in the early stages can avoid headaches later on. Essential items to include are:
- Partnership name: Partners can use their own names or create a fictitious business identity.
- Partner contributions: Outline who will contribute services, property or cash to the company and determine a percentage of ownership for each partner.
- Authority: Without an agreement, any partner can take on debt or “bind” the partnership without the consent of the other partner or partners. This outlines whether all must agree before taking on obligations.
- Allocation: How will profits, losses and draws be handled? This determines whether profits and losses are proportional to each partner’s ownership percentage and how profits are distributed – monthly, yearly or otherwise.
- Decision-making: This section outlines how big and small decisions are made, whether requiring a unanimous vote or allowing individual partners to make minor decisions on their own. It also defines the difference between major and minor decisions.
- Responsibilities: You should detail the specific duties and roles of each partner. This can include bookkeeping, negotiating with vendors, supervising employees and other areas.
- Departures: Many companies are jeopardized when one partner dies or decides to leave without clear instructions in place over what will happen to their share. Setting up a reasonable buyout ahead of time can avoid disputes or putting life insurance policies in place for each partner can help a company survive.
Avoid disputes and legal costs with a partnership agreement
Starting a new business is an exciting time. But significant conflicts down the road can derail even successful businesses without drafting sound procedures and rules at the beginning stages. Consulting an experienced business law attorney helps you comply with state, federal and local requirements when starting your company. They also help partnerships succeed by protecting against the many unknowns companies face.