Legal Partnership Agreements for New Businesses

Partnership Agreements for New Businesses are Critical

Launching a new business venture with a partner(s) is an exciting time, but partnership agreements for new businesses are essential. You and your partners likely have ambitious plans to boost profits, expand operations, and bring your shared vision to life. But without consulting with an experienced business attorney and ensuring that a partnership agreement is in place, conflicts and legal disputes are more likely to occur. A partnership agreement will include details about profit and loss sharing, decision-making procedures, dispute resolution methods, and more. Whether you’re opening a new pizza parlor or starting an accounting firm, you may find this blog article helpful, as it explains the importance of having a partnership agreement in place early on in your venture. It also highlights some of the most common mistakes business partners make—mistakes that often lead to legal disputes and reduce the likelihood of long-term success.

Take Your Time

Many businesses don’t survive beyond the first few years. To improve your chances of success, avoid rushing into a partnership. Take the time to create a solid business plan, a clear partnership agreement, and a well-thought-out long-term strategy. This is when consulting with an experienced business attorney can help you avoid potential legal issues.

Why a Partnership Agreement is Vital

Partnerships are often formed between close friends, colleagues, or family members. As a result, many partners assume formal agreements are unnecessary, relying instead on trust and verbal understandings about capital contributions and equity splits. However, this assumption frequently leads to misunderstandings, disputes, and even legal action. From liability issues about partner misconduct to a host of other potential issues that may arise, every partnership should have a clearly written partnership agreement written by a business attorney to spell everything out in detail.

Potential Issues that May Arise

• Deception and False Representation

Concealing information, making decisions without approval, or providing false information about the company’s financial health.

• Failure to Uphold Fiduciary Responsibilities

Conducting business deals for personal gain. Partners are legally and ethically required to prioritize the interests of the partnership and avoid self-dealing or conflicts of interest.

• Failure to Fulfill Obligations

Your business partner does not carry out the responsibilities that were mutually agreed upon.

• Unclear Roles and Responsibilities

It is unclear what each partner’s responsibilities are in the company. Without a legal agreement clearly defining the roles and responsibilities of all partners, this can result in partners not knowing who is responsible for what and can cause potential breaches of agreement. 

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  Non-Existent Exit Strategies and Lack of Non-Compete Agreements

Your partner becomes incapacitated by a serious illness, or they want to leave the business and join forces with a competitor. A concise exit strategy including a covenant not to compete is vital for these types of scenarios.

These are just a few of the legal pitfalls you may encounter without a partnership agreement. If you find any of these scenarios disconcerting, the Rochester, NY, business attorneys at Ronald J. Axelrod & Associates have some recommendations.

What You Can Do

1. Engage with a business attorney early during the business formation stage to create a comprehensive agreement covering ownership, duties, finances, and conflict resolution.

2. Carefully evaluate potential partners for their experience, financial reliability, and ethical conduct.

3. Obtain a valuation of the business to assess its financial value, typically by a third-party professional. 

4. Define the procedures and conditions under which one partner can buy out another's interest in the business.

5. Ensure there is a non-compete covenant in place.

6. Outline specific procedures for resolving disputes.

7. Foster transparent and honest communication with partners to promote accountability.

   
   

Conclusion

If you are considering starting a new business, or if you’re currently in a partnership and have legal concerns, taking a proactive approach by consulting with an experienced business attorney early on is your best chance for the long-term success of your business. Contact Ronald J. Axelrod, a business attorney in Rochester, NY, to set up an appointment. Or call us at (585) 210-2673.

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