photo of contract and gavel

A Written Partnership Agreement Protects Your Financial Interests

On behalf of Darren Harrington

The Dallas Morning News recently reported that small business owners are optimistic about 2015 although they worry about dysfunction in Washington and rising health-care costs. A Gallup survey showed that some 71 percent of small business owners feel that their overall financial situation will improve during 2015. Not since the Great Recession have small business owners felt so confident about the future. Many small businesses in Texas and elsewhere are organized as a business partnership where two or more entrepreneurs associate to carry on a business for profit.

Whether a business partnership is successful largely depends on having good business partners. In some instances, people select business partners from among family members or friends. However, many people go into business with people that they do not know very well. Given that setting up a business is a major venture, you need to take care to carefully vet people you are thinking about going into business with.

The National Federation of Independent Businesses recommends several steps that you can take in order to screen prospective business partners that you do not know very well. First, hold several meetings with a potential partner. During those meetings, discuss your plans and ideas and get a feel for what the prospective partner is thinking and whether he or she has any good ideas to bring to the table. Second, give the person your resume and request one from him/her as well.

A third step is to request references and then proceed to contact those references. Preferably, the references will be people they have worked with or for. Be blunt enough to ask references whether or not they would recommend that you go into business with the person in question. Lastly, you may wish to consider doing a background check to find out about the type of person you are thinking of going into business with. To keep costs down you could run Internet searches on the prospective partner or, if you want to take extra care, you could hire a private investigator.

The Agreement

While Texas law does not require that the partnership agreement be written, it is wise if the agreement is put in writing in order to avoid unnecessary disagreements on how the business is to be operated. Keep in mind that it is considered to be highly risky to try to operate a business without a written partnership agreement.

According to the U.S. Small Business Administration, the agreement should-among other things-address how profits and losses will be allocated and how to dissolve the partnership should that become necessary. An important component of a partnership agreement is to set forth how decisions are to be made. A clear decision making process should be set up in advance so that business operations can proceed smoothly. Another key element of a partnership agreement is to have some mechanism in place for resolving disputes among partners.

Finally, it is important for the partnership agreement to address what happens if one partner dies, becomes incapacitated or decides to retire from the business. A buy/sell agreement would allow for the exiting partner's interest to be bought out by the remaining partners who wish to remain in business.

Seek Legal Counsel

Those considering forming a business partnership should contact a Texas attorney experienced in handling business formations. The attorney can draft a partnership agreement which will attempt-to the extent possible-to protect the respective interests of all the business partners.

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