Proactive Partnerships: 5 Potential Scenarios You Should Address in Your Partnership Agreement

Even relatively minor disagreements in a partnership can cause serious disruptions in business and can even force the partners to dissolve their partnership. Planning ahead can prevent many partnership disputes before they happen.

Any time that more than one person can make decisions that significantly affect the business, a partnership agreement should be in effect. Although written partnership agreements are not technically required to form a partnership in California, having certain things in writing ahead of time is a good idea. These agreements should contain more than just who owns what, however. They should also address what will happen should certain circumstances occur. The following scenarios should be addressed in your partnership agreement.

The Death of a Partner

If the death of a partner is not addressed in the partnership agreement, then the partnership will often dissolve automatically. You can prevent this by specifically laying out how the partnership will function after the death of a partner. If there are only two partners, then dissolution might make sense, but in many cases, dissolution of a partnership can result in serious legal and practical problems. Sometimes, the death of a partner may mean that a new partnership is formed, which can invalidate existing contracts or deals, and cause a number of problems. Death of a partner can also mean that children step into an ownership role, which you may or may not like.

Partner Getting Divorced

If a business partner goes through a divorce, their former spouse may be given part of the partnership through the divorce proceedings. While some partners can simply buy their ownership from their former spouse, this is not always the case. Drafting a partnership agreement that deals with the potential for divorce can prevent an unwelcome partner from having a voice in your business venture.

Dealing with Retirement

It is possible that one partner will want to retire before the other is ready to hang up their tools. What will happen to your partnership in this type of disagreement? A partnership agreement can provide for buyout options under these circumstances. Without an agreement, one partner can sometimes force the legal dissolution of the entire partnership by bowing out. If the partner has an active role in the company, it can also result a business having to close its doors as well.

Internal Disputes or Differences of Opinion

Sometimes, a dispute can ultimately end a partnership. However, if the partners include a dispute resolution process in their partnership agreement, this is far less likely to occur. Voting procedures, mediation, and other dispute resolution avenues can be extremely useful. Creativity may be important in developing this type of provision.

Partner Incapacitation

If a partner becomes incapacitated, should his or her shares of the profits and expenses continue? How will voting procedures change if a partner is incapacitated? While dealing with the idea that a partner may become incapacitated can be difficult, it is often necessary for the survival of the partnership.

Each of the scenarios could hamper a partnership’s ability to conduct business, grow, and thrive. Thinking about these unfortunate scenarios ahead of time is often the best way to combat potential legal and practical problems. A business law attorney who deals with partnership agreements frequently in California can help develop a partnership agreement that works for you and all of your partners. Call (925) 399-1529 to set up an appointment with Integrated General Counsel today.

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Written by Integrated General Counsel

Our focus includes handling a variety of corporate matters and also includes litigation in state and federal courts. Our current practice includes providing transactional services and representing a variety of small and medium-sized companies as their outsourced general counsel.