A carefully crafted partnership agreement lays the groundwork for a successful and sustainable business relationship. It defines roles, responsibilities, and expectations while providing a framework to handle disputes and unforeseen challenges. In this blog, Tamara B. Pow – Founding Partner, of Strategy Law, LLP, shares key insights from her extensive experience with partnerships and business law on the critical elements that can make – or break – a partnership.
1. Dispute Resolution: Avoiding Public Conflict
Disagreements are inevitable in any partnership, so the partnership agreement should ensure disputes are handled discreetly through mediation or arbitration. A clear dispute resolution clause protects the business’s reputation and prevents conflicts from becoming public.
“You want to avoid airing your dirty laundry if it goes there and minimize your reputational damage at the back end of a partnership.”
Establishing dispute resolution procedures ensures conflicts are managed efficiently, preserving the partnership’s integrity and minimizing disruptions.
2. Planning for Life-Changing Events: Buy-Sell Terms
Partners must plan for life events such as retirement, disability, death, or divorce. A buy-sell agreement defines how a departing partner’s share will be valued, transferred, and paid out. This ensures fair treatment while preventing financial strain on the business.
“What happens on massive life-changing events like death, disability, divorce, retirement? Are the payment amounts different if you retire versus if you leave the firm to go compete?”
These terms can help the firm manage transitions smoothly by specifying payout timelines and conditions, avoiding liquidity issues and internal disputes.
3. Expulsion Clauses: Removing a Problematic Partner
A partnership agreement should contain provisions to expel a partner whose behavior negatively affects the business or violates its mission and values. This could include unethical conduct, reputational harm, or failure to meet expectations.
“I had one partnership that had to deal with somebody who landed up in the January 6th Insurrection and… was posting on Facebook and it became incredibly embarrassing … and they needed to be able to trigger something in the partnership agreement to get that partner out.”
With clear expulsion clauses, the partnership can swiftly address misconduct and prevent further damage to the business.
4. Financial Contributions and Credit Management: Avoiding Debt Pitfalls
A good partnership agreement should outline the financial contributions required from each partner and the business’s credit management practices. It is crucial to avoid over-reliance on debt for operational expenses. Partners should contribute their fair share of capital rather than using loans or lines of credit.
“If you get a line of credit… don’t use it to pay yourselves… It gets incredibly expensive and it creates a lot of problems when you want to dissolve the entity or separate from your partners.”
Partners must also ensure that loans are properly secured to avoid complications if a partner leaves the business.
“Don’t loan funds for initial capital contributions… Make sure that you get the adequate security you need so that if they don’t pay or if things don’t work out you can simply remove them from that partnership.”
Sound financial planning from the outset minimizes risks and ensures long-term stability.
5. Governance Structure: Avoiding Deadlocks and Defining Leadership
Establishing a clear governance structure helps avoid disputes and ensures the business operates smoothly. The agreement should specify roles and responsibilities, including the designation of a managing partner or decision-maker. Avoiding equal ownership splits helps prevent deadlocks.
“I highly recommend against 50/50 ownership. It causes many more disputes later and arguments.”
Organizational charts can further clarify responsibilities, ensuring that all partners understand their roles in the business.
“In my first partnership, we drew the org chart out… It was very clear whose name was in each box… There was one box up at the top… who the CEO or managing partner is…”
This clarity promotes accountability and ensures partners focus on their individual strengths.
6. Confidentiality and Asset Ownership: Preparing for Dissolution
A confidentiality clause ensures sensitive information, such as client lists or proprietary processes, are protected. Additionally, the agreement should define ownership of key business assets, including websites, phone numbers, and emails, to simplify dissolution if necessary.
“Consider owning your own web page, phone number, email or blogs… so that it’s easier to dissolve on the back end if you’re starting a new small partnership.”
Planning for asset ownership early on makes it easier to separate assets if the partnership ends, minimizing conflict during transitions.
7. Regular Review and Updates: Adapting as the Business Grows
A partnership agreement must evolve with the business. Regular reviews and updates ensure the agreement remains relevant and effective as circumstances change.
“Revisit them, amend them, and then make sure you’ve got all the right provisions in there.”
By reviewing the agreement annually or every few years, partners can address new challenges, adjust strategies, and keep the business agreement aligned with the business goals.
8. Liability Management: Protecting Personal Assets
The agreement should outline how liabilities are shared among partners to avoid leaving any one partner exposed. This includes provisions for indemnification and the sharing of debts, taxes, or legal obligations.
“You need to talk with your partners about those liabilities and about things like indemnifications… unless he has a contractual right to go after his partners for their share, it’s all on him.”
Proper liability management helps partners avoid unexpected personal financial burdens.
9. Exit Strategy and Dissolution: Planning for the Unexpected
Even successful partnerships may end. An exit strategy ensures that partners can part ways without conflict, and a well-defined dissolution process minimizes disruptions to the business.
“Have a plan to unwind or dissolve… Put the details in there so, for example… you can trigger something in the partnership agreement to get that partner out.”
This proactive approach ensures smoother transitions and protects the business if partners decide to separate.
10. Engaging Experienced Legal Counsel: The Value of Expertise
A well-drafted partnership agreement requires experienced legal guidance. Skilled counsel ensures the agreement anticipates challenges and is aligned with legal and regulatory requirements.
“Get qualified counsel with real experience… somebody who isn’t dabbling in doing partnership agreements but actually has done many and knows what else is out there and knows what happens… when partnerships dissolve and not just when everybody’s happy on the front end.”
Engaging the right legal expert helps partners avoid costly mistakes and ensures the partnership agreement is comprehensive and enforceable.
Summary
A strong partnership agreement provides the foundation for a successful and sustainable business relationship. It addresses potential challenges, defines roles and responsibilities, and ensures partners are aligned on goals. With essential provisions such as dispute resolution, governance structure, buy-sell terms, and expulsion clauses, the agreement minimizes risks, protects all parties and sets the business on a path to long-term success.
This blog is written as of January 2025. Recommendations and legal requirements are changing rapidly, so please continue to review our legal updates or review postings on relevant government websites.
All blogs on this site are for educational purposes only, do not constitute legal advice or opinion, and should not be applied to your situation, or any specific situation, without consultation with counsel. Strategy Law, LLP does not provide any legal advice concerning any matter discussed in a blog except upon formal engagement including, without limitation, execution of Strategy Law, LLP’s formal legal services agreement, and with respect to specific factual situations. No blog constitutes a guaranty, warranty, or prediction regarding the result of any legal matter discussed in the blog or any representation.