Partnership Agreements: A Business Pre-Nup

By: Suzan Hixon and Brittany Riley

            Entering into a Pre-nuptial Agreement is viewed by many modern couples as a preparative and cautionary step rather than a forecast for a stormy marriage. However, this trend has not been analogously spilling over into the business realm with the use of Partnership Agreements. Unfortunately, many entrepreneurs form partnerships without entering into Partnership Agreements, basically a business Pre-nup! Business partners worry that defining the terms and charting the course of a corporate breakup will cause tension in the business relationship. Can the awkwardness of having this binding document looming over the business be avoided? Can business partners trust each other knowing that certain actions will most certainly throw them into default and begin the track to the disintegration of the business entity?

The answer is YES! The purpose of a Partnership Agreement is much like the Pre-nuptial Agreement that couples enter into before entering a marriage. It defines the business relationship and maps out how the parties to the agreement shall proceed in the unfortunate event that the relationship or business fails. Like partners in a marriage, business partners do not go into the relationship assuming it is going to fail. However, it is smart to go into any association with a mutual understanding. And a Partnership Agreement (as well as the Pre-nup) serves to solidify that mutual understanding.  Similar to a Pre-nuptial Agreement, a Partnership Agreement sets out what the business partners agree to during the course of the business relationship. The Agreement explicitly details the obligations and contributions of each partner to the partnership. It should attempt to cover as many business situations as possible that could arise during the partnership’s life; however, business partners and attorneys cannot see into the future. Partnership Agreements could have holes, and, like a Pre-nup, a truly ironclad Partnership Agreement is rare. Nevertheless, a Partnership Agreement is a great way to make sure there is a meeting of the minds going forward into the relationship.

Thus, certain elements are essential to any partnership agreement, such as the duration of the partnership, the business purpose, each partner’s contribution/compensation, management authority, admittance of new partners, and disposition of the partnership.  One of the most important elements of any Partnership Agreement is dispute resolution. This clause stipulates the type of mediation or arbitration to be utilized in the case of disputes that cannot be resolved amongst the partners. It is here that a Partnership Agreement is most similar to a pre-nuptial agreement in its “safeguarding” effect on the relationship. A clause such as a dispute resolution clause acts as an impediment to a hasty “divorce” between partners. Participating in mediation/arbitration is akin to going to marriage counseling in that it causes the parties of the relationship to attempt to resolve their issues before taking the ultimate step of dissolution.

Therefore, it is important for business partners in any form of partnership, whether it is a small start-up business or a large operation, to consider the breadth, boundaries, and limitations of their relationship and to overtly form a goal. Like any marriage, no one wants to fail. On the other hand, one must be realistic and realize that problems will arise and agreement may be difficult to obtain. In these instances, a Partnership Agreement is a valuable and effective tool for resolving such issues. Each partner will enter into the relationship knowing what is expected of him/her and what he/she can expect from other partners and the business entity. Furthermore, partners can rest assured that a system is in place in the event of major disputes that may put the success of the entity in danger. Entering into an agreement before any relationship is not anticipation of an end; rather, it is an exercise of caution, preparation, and hope for a strong relationship by setting goals, expectations, and procedures for resolving conflict at the outset of such an association.