Partnership agreement: to be or not to be?

Rubric: Uncategorized

Since the fall season has become a fashionable trend for formalizing partnership agreements among my clients, I would like to summarize some, so to say, lessons learned.

Question #1: To write or not to write?
Question #2: What main chapters/sections should be covered by a partnership agreement?
Question # 3: What are the indications for formalization?

I, personally, hold a position that the formalization of processes (though partners’ relationship is yet that tricky process) is always good. Moreover, it goes well till everything is well in business. So, while all’s good and everyone’s good — it’s time to secure the basic points/statements on paper.
Partnership agreement should describe the principles of (a) enter partnership, (b) life in partnership and (c) exit from partnership.

«Enter partnership»

  • Criteria for entering partnership (from the market; or due to the internal growth);
  • «Layers» of partnership;
  • Capital contribution (property and/or funds contributed by a partner);
  • Values ​​and philosophy of this partnership (more details — in a separate article).

«Life in partnership»

  • Expenses and principles of their distribution among the partners;
  • Generation of partners’ income;
  • Distribution of partners’ revenues;
  • Partners’ advances;
  • Principles of operational business management and managing partner of the elections;
  • Distribution of roles in the partnership and consolidation of functional responsibilities;
  • Principles of decision-making;
  • Issues requiring agreement of all partners (unanimous decision).

 «Exit from partnership»

  • Exit from partnership (due to retirement);
  • Exit from partnership in case of illness, disability, death of a partner;
  • Expulsion from partnership;
  • Self-dissolution of partnership.

A decision on formalizing partnership is an individual matter for each partnership.
However, in my opinion, there are some factors, which mostly put this issue on modern partnerships’ agenda:

  • Period of partnership — from 5-7 years;
  • Multi-layered partnership — availability of different categories of partners in partnership;
  • Preparing for adoption to partnership (from outside or inside);
  • Availability of «jointly acquired» property in partnership;
  • Firm’s  potential M & A.

And, finally, anticipating questions, I would say: ‘Yes, it will an absolutely internal document’. Its purposes are: (a) to become guidelines for partners in situations, when emotions overshadow the mind; and (b) to be a basis for making consistent decisions by partnership.

Partnership agreements are game rules, but not evidences in the game «Who is the best lawyer among us?»