Partnership is an association of two or more people to engage in business for the purpose of proportionately sharing the profits and losses of that business (as well as assets and liabilities). This means that partners decide on how they will share the profits and losses in % terms. A partnership can be formed in writing or orally, as what makes an association a partnership is not the paperwork, but the actions of the members of a business association. In other words, if people act like “partners,” then they will be recognized and treated as partners under California partnership law.
Despite that, like in any business deal, written partnership agreements are highly recommended to memorialize the essential terms and conditions of the business relationship and to avoid misunderstandings between the partners.
Like any other relationship, such as friendship, marital ties, etc… a business partnership necessarily involves and thus depends on the character and the emotions of its members. Thus, it is absolutely crucial that if you decide to enter into a business partnership with another person/s, you should actually like each other, respect each other, and at least somewhat feel comfortable around each other, as you will be spending a lot of time together.
Associating with someone you don’t like into a partnership just because the other partner has the needed skills and knowledge in the specific industry or the required capital is likely to be a mistake, as you will not be happy working with someone who you can’t stand, which will hurt the productivity and profitability of your business venture and will inevitably lead to conflicts down the road.
Like many other relationships, partnerships form and dissolve – sometimes peacefully and sometimes after protracted, expensive and stressful legal battles, involving lawyers, judges and opposing counsel that will do everything in their power to discredit and undermine your position as they are paid to do so. From my experience, one of the most common reason for conflicts between partners is the ambiguities, and lack of clarity in the terms of the partnership agreement. Many people who enter into a business relationship, such as partnership, assume that things will work out and there will be no conflict and will not bother to outline clearly and specifically all the respective rights, duties and obligations of partners, which is extremely important to any and every partnership.
It is unfortunate that most people who plan to form a partnership don’t bother to consider getting legal advice on forming a partnership the right way and avoiding misunderstandings between partners in the future that lead to conflicts and litigation, and only turn to a business attorney after the fact – when the agreement is violated, which is much more stressful, time consuming and expensive than having the partnership agreement draft clearly and properly, to cover all the essential terms.
Here are just some of the essential terms that every partnership agreements should have: the capital contributed by each partner, rights, duties and obligations of each partner, termination of partnership, the power and the process of adding, removing or replacing a partner, hiring and terminating employees, human resources issues, allocation of profits and losses, voting rights, dispute resolution – choice of forum (location for such proceedings) and choice of law (which State law will apply to resolving disputes).
Partnership can be a very effective, profitable, and enjoyable enterprise to be involved in, but to make the most out of such a business entity, you must make sure that it is formed competently and thoroughly. No one can fully protect himself from disputes, but it is quite possible to significantly minimize the likelihood of those business disputes and make the potential resolution of the potential disagreements easier and faster.