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Preventing Partnership Disputes: Drafting a Partnership Agreement Can Go the Distance

business-partnership-agreement.jpgWhen you decide to go into business with someone, you think about many things. It is great to have a partner, as two heads are better than one. Also, it is a much more exciting endeavor when you are working with a friend, and sometimes having a partner can also lead to an exponential increase in profits. This type of business arrangement, working with a friend or close acquaintance, is common in many businesses today.

Under California law, a partnership is formed when two or more individuals carry on as co-owners in a for-profit business, whether or not they intend to create or form a partnership. This means that, under California law, all you need to form a partnership is an agreement with another individual to operate a business for profit. For example, if John and Sam agree to split profits 50/50 and to sell lemonade, for a profit, at 25 cents per glass on the corner of ABC Avenue, they have theoretically entered into a partnership under California law.

Unfortunately, in many of these situations, disputes arise, even amongst friends. However, many of the disputes that arise in partnerships can be avoided when a written partnership agreement is drafted.

Why Partnership Agreements are Important

A partnership agreement can prevent many legal issues that may arise and any potential disputes amongst partners. The most important terms in the partnership agreement are the terms and conditions of the partnership. These terms should include:

  • The name of the business;
  • Goal of the partnership;
  • Each partner's percentage of ownership of the partnership;
  • Percentage of profits each partner is entitled to;
  • Manner in which profits are distributed;
  • How and when important decisions are made;
  • How to handle the withdrawal or death of a partner; and
  • The procedure for introducing new partners to the partnership.

    Typically, the best practice is to set up the partnership equally, so that each partner has an equal interest in ownership in the business and shares equally in profits. The most common partnership disputes arise when one or more partners are being treated unequally, or when they believe they are being treated unequally. If all partners are treated equally, the chance of a partner feeling or being treated unequally is significantly reduced, if not eliminated.

    Contact an Attorney

    Many individuals starting new a business forego hiring an attorney to draft a partnership agreement; or worse, they try to prepare an agreement themselves. This may be the case because they are excited to begin working on their passion or they may believe the money spent on an attorney is not worth it.

    However, hiring an experienced San Jose business litigation attorney will save you thousands of dollars down the line, if there is an ambiguity in the agreement or if a partnership dispute arises that cannot be reconciled. If you spend some money now, you will avoid many headaches in the future and you can focus on growing your business.

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