A Partnership Agreement-A Must for Business Partners

June 21st, 2016 at 9:16 AM

Let me me perfectly clear from the outset–I’m not suggesting your business to be structure as a partnership. The tax consequences and tax laws are most complicated for this type of entity, in addition to the immense social challenges that face partners in business today.

Three Crucial Reasons to have a Partnership Agreement

1. Restrictive Covenants. The 3 main restrictive covenants are a non-compete, a non-disclosure, and a non-solicit. A competent partnership agreement will address all three covenants. A non-compete can restrict a departing partner from competing with the business for a certain period of time and within a certain geographical region, as appropriate. A non-disclosure can restrict a departing partner from taking confidential and proprietary information and disclosing it to third parties or using it in an adverse manner. A non-solicit can prevent a departing partner from taking clients of the business.
2. Buy-Sell Agreement. This can be a stand-alone agreement or drafted at the time of the partnership agreement. The purpose of this provision is to address the 4 D’s–death, disability, dissolution, and divorce. You must have a mechanism in place to deal with this before, rather than after the event. For example, you can decide on the purchase price, and how it will be paid–lump sum, installment payments, etc.
3. Partnership Allocations. You and your business partner may have different financial and tax situations–whereby it may be more advantageous for one partner to allocate partnership items of income or loss on a basis different from the ownership/interest percentage in the business. Be careful to address “the substantial economic effect” as pertain to the IRS regulations in this arena.

These are just three reasons to have a partnership agreement–there are more, of course. Each business as well as the partners dictate that each partnership agreement fit the business like a well-tailored suit.