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Why a partnership needs a written partnership agreement

On behalf of Steven Waldinger

This article looks at why it is important for business partners to have a written partnership agreement.

Partnerships are among the most popular business structures in New York and across the country. Unlike a sole proprietorship, partnerships benefit from being able to pool the resources and skills of two or more people. In many cases, a partnership also allows liability to be split between the partners. However, one mistake that many people entering into a business partnership make is deciding not to put their partnership agreement down in writing. A written partnership agreement should be considered an essential part of any business partnership as forgoing one exposes each partner to unnecessary risks.

What does a partnership agreement do?

The best way of understanding why a partnership agreement is so important is by first understanding what this type of agreement does. A partnership agreement is a legally binding contract that essentially sets out the roles and responsibilities of each partner in the business. As The Balance notes, while partnership agreements vary from one business to the next, almost all of them address the following basic issues:

· How profits and losses are split between the partners

· The share of the business owned by each partner

· The length of the partnership

· Procedures if one partner wants to buy out the other partner

· How the partnership can be ended

Even simple partnerships need to be written down

Some people going into a general partnership may think that because they plan on splitting all profits, losses, ownership, and responsibilities 50/50, that a partnership agreement is unnecessary. Even with simple partnerships, though, a partnership agreement is a necessity. The role of each partner could change over time, for example, or one partner may feel as though they are putting more into the business than the other partner. Disputes are more likely to arise if the role of each partner is not clearly put down in writing.

Unforeseen events could also cause problems. As Forbes notes, a good partnership agreement should address what happens to the business if one partner passes away or becomes disabled. In the event that one partner dies, the surviving partner could end up having to deal with the deceased partner’s spouse or family. Those surviving heirs may not necessarily have an interest in keeping the business going or may not agree on what their share of the business is worth.

In addition to these problems, a partnership agreement helps override state laws that may not be beneficial to either partner and could help avoid tax, legal, and liability issues.

Business law help

Anybody starting a business in New York needs the guidance of an experienced commercial law firm on their side. An attorney can help small business owners ensure they are compliant with the law and help them avoid potentially costly and time-consuming disputes.