McNamee Hosea News & Press


Business Partnership Agreement FAQs

Many Marylanders who set up a business do so by entering into a business partnership with one or more other entrepreneurs. Partnerships have the virtue of being relatively easy and inexpensive to set up. The Huffington Post notes that 50 percent of new businesses fail within the first five years. With that in mind, those contemplating setting up a business partnership need both good business partners and a detailed written partnership agreement in order to launch the business and then keep it on the right track. Here are a few frequently asked questions.

How should I choose a business partner?

Generally, partners should be selected based on their ability to bring the necessary funds, property, labor and specialized skills to the business. One of the most important reasons for having business partners is for the fledgling business to benefit from diverse talents which will provide "a sense of wholeness" that one person could not have achieved in setting up a sole proprietorship.

How should I assess a potential business partner?

Evaluating a potential business partner can be tricky if you do not know that person very well. However, as noted by the Fits Small Business website, choosing a business partner is akin to choosing a spouse. You are wise to be sure you and the prospective partner are going to be compatible in working with each other since you are going to be spending a lot of time together. Finding yourself in business with a disagreeable partner who is difficult to work with could be a catastrophe.

One should determine if a potential business partner shares your work ethic and your vision for the business. Each prospective partner should be evaluated based upon their passion for the business and whether they seem to have good business judgment skills. If you do not know a prospective partner very well, ask for references. In addition, submit potential partners to both a background check and a credit check.

What should be included in a business partnership agreement?

While selecting the right business partners can get the business off the ground, a detailed written partnership agreement can keep the business in operation in the event that problems arise which threaten its existence as a business entity. As noted by the CBS News website, among other things, a partnership agreement should contain an exit clause which anticipates that one or more partners may want to withdraw from the partnership at some point. An exit clause in the form of a buy-sell agreement would give the remaining partners the right to buy out a retiring partner's share of the business.

A buy-sell provision could also be triggered if a partner were to unexpectedly die. Many agreements contain a stipulation that each partner will carry life insurance designating the other partners as beneficiaries. If a partner dies, the life insurance proceeds would fund the buy-sell agreement enabling the remaining partners to buy the departed partner's interest in the business.

A good partnership agreement will also contain a provision which addresses situations where partners become unable to agree among themselves on how to operate the business. Such a provision could detail what happens in the event that partners become dead-locked in making business decisions. For example, a partnership agreement could require mediation or arbitration if the partners become deadlocked in their decision making.

Do I need a lawyer to draft a partnership agreement?

Those who are contemplating entering into a partnership should contact a Maryland attorney experienced in business formation who can draft a comprehensive and detailed partnership agreement.