When we are involved in the formation of a company with multiple owners, we typically refer to it as a “partnership.” Partnerships are complex because the legal term is different than the concept of partnership for economic purposes. An economic partnership can take many forms, such as a partnership agreement, an LLC agreement, or a corporation. Legally, the form is tailored to a situation, worked out by your legal advisor, your partners, and you.
Regardless of legal form, there are certain things that need to be clearly understood in a partnership agreement. How are things are going to be divided? How is the business going to work? It is important to make sure that the business has a clear path forward, and that everyone avoids future disagreements and problems.
This means advanced planning, preparing for “what if” scenarios, and understanding how the business is going to grow and evolve. Spend time and attention on that, and deal with the four Ds, four things that are likely to happen in the life of the partnership.
#1 Death. One of the owners may die.
#2 Disability. Somebody involved in a partnership may become unable to work. What are we going to do to keep the business moving forward? What’s going to happen to take care of the disabled person? How are the economics going to work?
#3 Divorce. What if one of the married owners get a divorce? What happens to that ownership interest?
# 4 Disagreement. What happens if the owners start to disagree about the future of the company? It is not uncommon for owners to be in the business for some time, but then as things evolve, disagreements start happening.
What has been your experience with partnership formation? What types of issues are you aware of? What problems have you have experienced? Please share your thoughts in the comments below.
Each case is unique. Past results do not guarantee future outcomes. This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. Each case is unique. Past results do not guarantee future outcomes. This article should not be treated as legal advice to any person or entity. FreeImages.com/photographer Ria Mendoza.
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