Starting a business is incredibly exciting, but many first-time business owners don’t anticipate the myriad of responsibilities involved with setting up, running, and maintaining a business. The day-to-day aspects of business operations can involve lots of moving parts, which can lead to stress and sometimes confusion among the owners of a business. When partners form a business together, they must abide by certain legal duties and/or contractual promises to each other.
It can be easy for partners to not fully understand what to expect and who is responsible for what duties. The way a business partnership functions can vary depending on a variety of factors. Because of this, every partnership should have a formal partnership agreement in place to ensure all possible scenarios that could affect the business are legally formalized. When a partner fails to fulfill their obligations, partnership disputes can arise which can jeopardize the entire business endeavor.
Partners must always put the interests of the business ahead of their own personal interests. This non-delegable duty can be broken down into the following specific duties:
- Duty of Good Faith and Fair Dealing – Partners must always act honestly and fairly regarding the business. Deception or misrepresentation violates these duties, and partners can be held responsible for the damages resulting from their actions.
- Duty of Loyalty – Partners owe loyalty to the business. This means partners cannot engage in self-dealing and must avoid conflicts of interest. If there is a conflict of interest, the affected partner must immediately inform the other partners.
- Duty of Care – Partners will make many business decisions, some on a daily basis. When making decisions, partners are expected to act reasonably and with care toward both the other partners and the business itself.
- Duty of Full Disclosure – Every partner has a right to certain information regarding the business and the other partners. Partners must disclose information such as potential business opportunities, contracts entered into, finances, and operations to their other partners.
What is a Partnership Agreement?
A partnership agreement is a legal document that both sets out the terms and conditions agreed to by those involved and dictates how the business will be run. Many clauses should be included within a partnership agreement, including those designed to ensure any conflicts that could arise have a designated process for being resolved. There are three main types of partnership agreements in Texas and the language of the partnership agreement for each will vary according to the entity type and a variety of other factors:
- A general partnership (GP) agreement: In a general partnership, two or more general partners go into business together and each treats the partnership income as personal income. Without a clause written to the contrary, the default rules in Texas hold each partner equally responsible for the income and debts of the business. While legally you are not required to draft a formal GP agreement, you should definitely have one.
- A limited partnership (LP) agreement: A limited partnership has both general partners and limited partners, and each type has different rights and duties. A limited partner can only be subject to financial liability up to the amount of their investment in the business. General partners, however, are responsible for all debts and control the daily operations.
- A limited liability partnership (LLP) agreement: A Texas LLP provides personal liability protection for all partners from all business debts and other liabilities. Professionals like lawyers and doctors commonly form their business entities as LLPs.
The following items should always be included in a business partnership agreement:
A thoroughly drafted partnership agreement should detail the roles and responsibilities of each business partner, including but not limited to stating who is in charge of daily operations, who can make significant financial decisions on behalf of the business, and who has the legal right to bind the partnership through contracts with others outside of the business.
Percentage of Ownership
In each partnership, the partners commit to their contribution to the business. While some partners may agree to invest capital in the business as a contribution to help cover costs, others may prefer to assist with equipment and service offerings. These different contributions can be one component that helps dictate the percentage of ownership for each partner. In addition to capital contributions, the role each partner plays – including their estimated work contribution to the day-to-day operation of the business – can dictate ownership percentage in just as meaningful of a way as a financial investment.
Division of Profits
The division of profits in a partnership agreement dictates how business profits and losses will be allocated among the partners. Partners can agree to share in profits and losses in accordance with their ownership percentage or the division can be allocated to each partner equally. These terms should be detailed as clearly as possible in order to avoid potential conflicts throughout the duration of the partnership.
Contrary to popular belief, not all business partnerships run for an indefinite amount of time. Though long-term partnership success can be common, there are still instances where a business will dissolve after reaching a specific milestone, after a specified number of years, or due to another triggering event. Considerations in drafting include what happens if a partner dies or withdraws, what happens if a partner gets divorced (as Texas is a community property state), what happens when the company brings on additional, new partners, and how the partnership will dissolve if needed.
Common Clauses to Include in a Partnership Agreement
Some of these clauses detailed below can apply to a variety of businesses, not just to partnerships. An experienced Houston business lawyer can help you determine which clauses your partnership agreement needs to include, including but not limited to:
Non-compete agreements can be used in a partnership agreement to restrict a partner from leaving the partnership for the purposes of competing with the partnership and/or from competing with the partnership while serving as a partner. In order for non-competes to be legally binding in Texas, they must not be overly broad and must be drafted to confirm to set legal parameters, including limiting prohibited competition to a defined geographic area and for a set amount of time.
A non-disclosure agreement is designed to keep sensitive business information – including trade secrets – confidential. These agreements can and often should be used any time confidential information is disclosed within a business entity.
Should partners find themselves at odds with each other, alternative dispute resolution options can be dictated by a partnership agreement as an alternative to litigation. Whether arbitration or mediation, a business partnership agreement can mandate which dispute resolution option will be used by the disputing parties to resolve a disagreement.
Why Seek an Attorney to Draft a Business Partnership Agreement?
The governing document for any partnership dispute is the business partnership agreement. If you use an online form or try to draft it yourself, you will likely not be as thorough as an experienced business attorney who has drafted, reviewed, negotiated, and finalized hundreds of similar documents. Partnership disputes are very delicate legal matters. If not resolved quickly and efficiently, these disputes can snowball out of control and destroy a business. The best way to preserve the business at the heart of a partnership dispute is to work with an experienced business attorney to set up your business appropriately and counsel you in the event of a dispute. A partnership dispute lawyer will be able to assess the situation and devise a strategy for a resolution that both complies with the terms of the business partnership agreement and protects the hard work partners have put into their business endeavors.
Houston Business Partnership Agreement Attorneys
Business contracts help to allocate the risks, benefits, liabilities, and more among the parties involved. When drafting a contract like a business partnership agreement or negotiating its terms, it’s important to have skilled legal counsel on your side. At Feldman & Feldman, we have extensive experience working with businesses to draft, negotiate, and finalize all types of entity formation documents, including business partnership agreements. If your business needs assistance, contact our business lawyers today for more information.