Partnership Agreements

Q. I'm entering into a partnership with a very good friend in which we will offer bookkeeping and tax filing services for our clients. Do I need a formal agreement and if so what should it include?

A. A partnership in an association of two or more people who operate a business as co-owners. While they are relatively easy to start, under adverse conditions, they can be extremely difficult to dissolve. Since the possibility of one or more parties wanting to end the arrangement, because of conflicts and issues that may arise, or the death of a partner or to avoid misunderstandings a legally binding partnership agreement needs to be developed and executed by all parties. Such an agreement should include, at a minimum, the following provisions:

A buy-sell agreement which will spell out the terms to accommodate the departure of a partner resulting from death, illness, resignation or retirement.

How much each partner is going to invest in the business in the way of money, property, equipment or less tangible items i.e., ideas, invention, etc.

What amount of value will be placed on invested items and how will that value be determined.

What methods will be used to determine how profits and losses will be divided between the partners.

How a partner(s) may be compensated for special contributions or services rendered beyond a pre-determined split of profits.

When profits can be withdrawn and how this should be accomplished.

How to handle a change in the partnership as a result of a partner being added to the business or there has been a change in the ownership interest on an existing partner.

In case of a two person 50/50 partnership how decisions are to made in case both parties donít reach the same conclusion

 Any such agreement should be prepared by an attorney to insure that the interests of each partner are understood and protected and as many issues as possible are pre-determined in the legal, written document.

It should be mentioned that some partners do not like the idea of having a partnership agreement. They see it as a lack of trust or faith of the other party(s) that the business arrangement is going to work. However, if you review the areas to be covered in the agreement you can readily see that they donít infringe on any areas of "trust or faith" but deal with many issues that can't be controlled or foreseen by any individual and/or document areas of understanding involved in setting up the business which, over a period of time, can be partially or completely forgotten.