What to consider before adding a partner to a growing Cleveland business
It may take adding a partner to grow your business to the next level. A partnership agreement can reduce conflicts by clearly spelling out the obligations of each partner.
As your business takes off and expands, you may have the right employee who you would like to bring on as a partner. Or it may make sense to add a partner with a complimentary skill set to grow the business after a plateau. These business growth opportunities require careful planning.
Because a new partner may change how you file your taxes and open you up to additional legal liabilities, it is important to consider the individual’s role. For example, will the new partner have a day-to-day role in company management? Does the person want a more limited role after an initial investment?
Clearly communicating and negotiating duties, division of profits, the resolution of disputes and winding down the company are all important. If you do not discuss these issues at the beginning of a partnership, misunderstandings can later escalate and even lead to drawn out business litigation.
Acting like partners or co-owners without having a formal written agreement can easily lead to problems. Email exchanges discussing partnership and new duties or dividing profits could even establish an implied partnership in certain cases.
Avoiding an implicit partnership and assumptions
A partnership under Ohio law is “an association of two or more people to carry on as co-owners a business for-profit formed under section 1776.22 of the Revised Code” or another comparable law. This is the case even if the parties do not intend to form a partnership. Likewise, a partnership agreement can be “written, oral or implied.”
When there is a dispute about whether a partnership existed, the court looks at many factors. Joint control of property or the ability of any member to bind the business could demonstrate an implicit partnership.
To avoid this type of situation, execute a formal partnership agreement before splitting profits or taking other actions that could be construed as evidence of a partnership.
What needs to be in the agreement?
Many terms of a partnership agreement are straight forward, such as a name. Will you change the name of the business to include the partner’s name? Is it time to come up with a new company name? Prior to registering a new name, check with the Ohio Secretary of State website to determine whether it is still available.
Two other key parts of the agreement need to cover contributions from each partner and the allocation of profits and losses. Will an initial cash investment or work to build up a customer base affect ownership rights? How will the company pay each partner – a salary or quarterly/yearly disbursements?
Also, it is important to address who will have the authority to bind the partnership. Can one partner act alone to negotiate a contract or must he or she seek the approval of others? It may make sense to leave general decision making with one partner on routine issues, but require everyone’s approval on big ones. Spell out the difference between such decisions.
Put in a clause that details when and how to admit new partners as the business grows. Explaining what happens if a partner gets divorced or dies can also smooth the management of a partnership.
Spending time with a business law attorney to answer these questions in the early stages of your partnership can avoid future conflicts. A written partnership agreement can then operate as a road map as your business grows.
Keywords: Partnership agreement, Business law