One of the major advantages of a partnership is that they can be formed and maintained with relative simplicity- state registration is not required; there are no fees associated with formation; and income tax filings are uncomplicated. In fact, because partnerships are the only business structures that can be established through an oral agreement, individuals entering a partnership may believe that a written agreement is not necessary.

This notion, however, is misleading and could ultimately result in disputes with disastrous financial consequences. The flexibility offered by a partnership arrangement often exposes the parties involved to unique risks. The most effective and reliable way to minimize these risks and protect your assets in a partnership is to execute a written partnership agreement.

Even if you initiate a partnership with someone you trust, a written partnership agreement is essential to allocating risks during the life of the business, avoiding confusion and conflict as to the operation of the business, and planning for uncertain events, such as death or dissolution of the partnership. Because the operation of the partnership is largely determined by the partners themselves (rather than statutory law), partners should use formal agreements to set forth important matters of governance. Some of the issues to be addressed in a written agreement include:

Determining responsibilities. Partners are generally free to allocate responsibilities and duties among the partners in whatever manner they agree upon.

Allocating profits and losses. The distribution of profits and losses in a partnership is largely determined by the partners, thus allowing a partner who operates with greater financial risk to be entitled to higher profits.

Establishing ownership interests. Partners are not required to have equal ownership rights in the partnership.

Determining voting rights. Partners should decide in advance how decisions will be handled if a significant dispute arises (particularly in a two-person partnership).

Withdrawal procedures. Partners must agree upon how the partnership will be dissolved, who will determine the purchase price, and how it will be distributed.

Ultimately, the stakes in a partnership are considerably higher because all members of a partnership are personally liable for the debts and obligations of the partnership. Thus, critical matters governing the partnership should not be settled through oral agreement alone.

Contact Shane Coons at 949-333-0900 or visit his website at www.ShaneCoonsLaw.com to find out more about his practice.