Minnesota partnership agreements are crucial for those considering starting a business.
Whether your partner is a friend, family member or colleague, it is essential that you craft a detailed written agreement to clarify your rights and responsibilities regarding the business. To find out more about how important partnership agreements are, keep reading.
Minnesota Small Business Law | What are partnership agreements?
Partnership agreements are written documents that explain how your business will run, how ordinary decisions are made and how disputes will be resolved. Partnership agreements also explain matters such as ownership shares, profit division and how potential buyouts are to be undertaken. Because these matters can ultimately prove crucial down the road, it’s important to consult an experienced Minnesota small business lawyer who can help guide you through the process.
Minnesota Small Business Law | Who owns what?
The most important thing for a partnership agreement to explain is who owns what share of the business. Though it may seem obvious that two partners evenly divide the control and profits of a business, this is not always the case. It’s quite possible that one partner could have contributed more money early on or that the other partner has important skills vital to the success of the business. In either case, this might justify awarding a larger share of the partnership to one person or the other.
You need to specifically list the proportion of the business that each partner will own and the authority that will flow from that ownership. Doing so early on is the only way to avoid potentially explosive disputes later on.
Minnesota Small Business Law | Who makes the decisions?
Explaining who has what share of voting rights is another crucial aspect of any partnership agreement. Though ordinary decisions should be handled more informally, it is important to have a way to break damaging deadlocks. If there are three partners with equal shares of the company then it will be relatively simply to find a majority during any vote. For those partnerships with only two partners who have 50-50 control, you should devise a method for avoiding deadlock. Many times, these businesses provide for a third person or a trusted employee to break the tie, sometimes granting the person a nominal ownership interest in the business.
Though a deadlock may not seem like such a bad thing, the reality is that an impasse among partners often serves as the basis to unravel a business. If the dispute is over something critical to the future of the company, not having a way to break the tie is a good way to cripple the company.
Minnesota Small Business Law | What happens when one partner wants out?
Partnership agreements are all about planning for the worst. A perfect example of this is planning for a day when one partner wants to leave the partnership. If someone wants out, you need to have clear rules in place for how the exit will be managed to avoid harming the company any more than is necessary.
One component of this is to explain how the value of the partner’s share will be determined. To avoid fighting among partners, it is often easiest to agree to have a neutral third party, possibly an accountant or other trusted financial advisor, to appraise the business. This appraisal can then serve as the basis for determining the value of the person’s partnership interest.
After the value is decided, you may think the mater of withdrawal is done. However, many businesses lack the kind of money to buyout a partner in one lump sum. To ensure that the company isn’t crippled financially, you can draw up terms in your partnership agreement explaining that they money will be paid out over a period of time; perhaps two, five or even ten years into the future, with interest.
It’s good to know that with the right help, establishing a Minnesota small business does not have to be a scary proposition. An experienced Minnesota small business attorney can help walk you through the process of setting up your new company and ensure it offers the maximum benefits for your individual situation. For more information, contact Joseph M. Flanders of Flanders Law Firm at (612) 424-0398.
Source: “The Legal Ins and Outs of Forming a Partnership,” by Michael Spadaccini, published at Entrepreneur.com.
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