The adage goes that if partnerships were a good idea, God would have had one. Yet, in an era consumed by increasing consumer demand and digital transformation, business partnerships have increasingly become – when utilized effectively – an essential tool for growth and navigating the currents of change.
General partnerships are formed by two or more persons who join together to form a business for profit. (Corp Code §§ 16101(9) and 16202(a)). Like marriage, amicable relations are essential to the efficient operation and execution of partnerships.
Typical issues between partners center around management, allocation of risks and profits, admission/ termination of other partners, and agreements regarding finances and succession. These issues are important to be cognizant of because they are often the most overlooked from the outset of formation. Indeed, in forming partnerships, partners obligate themselves to share risks and benefits and to carry out the enterprise with the loyalty and care of a fiduciary. (Agam v. Gavra (2015) 236 Cal.4th 91,112).
How then can partners protect themselves before issues go awry? A well-executed partnership agreement.
The rights and duties of parties to a general partnership are governed by the partners’ agreement, which is established under principles of contract law. A partnership agreement may be written, oral, or implied. (Corp Code § 16101(10)). In other words, the form of agreement is inconsequential. The only requirement is that the agreement exists.
Partners are free to negotiate the rights and responsibilities of their business relationship. However, there is certain conduct that cannot be tailored, such as attempting to:
- unreasonably restrict the right of access to books and records (Corp Code §16403(b))
- eliminate the duty of loyalty (Corp Code §§ 16404(b) and 16603(b)(3))
- unreasonably reduce the duty of care owed to partners (Corp Code §§ 16404(c) and 16603(b)(3)
- eliminate the obligation of good faith and fair dealing (Corp Code §16404(d))
Transparency, loyalty, fidelity, good faith and fair dealing are the essential ingredients for any great relationship, and this is no less different in business.
To ensure you are taking the right steps to laying the foundation for your business partnership, with the guidance of an attorney, consider taking the following steps:
- Have “the talk” with your constituents and discuss the vision you have for your partnership
- Decide and document exactly what you want for your business and yourself
- Have your business attorney review your business plans, objectives, and supporting documents
- Execute a partnership agreement that not only aligns with and addresses the values of your business, but also one that facilitates an early settlement of differences and helps avoid premature dissolution
In the event that you and your constituents cannot come to terms on important matters, be willing to walk away. Never be afraid when it comes to addressing your concerns. Business partnerships can inevitably involve complex disputes, but with the proper tools in hand, coupled with pragmatic solutions to these concerns, you can easily ensure your partnership rises above these issues.
This article is not intended to provide legal advice. Every business partnership is unique, and businesses/ constituents should always consult with the appropriate professionals when considering a partnership venture.
Contact the offices of Bremer Whyte Brown & O’Meara LLP today to learn more about business partnerships and agreements.