One of the first decisions new partners face in pursuing a new business venture is what type of business entity to form. Options include forming formal business entities such as a corporation or limited liability company (LLC) which are registered with the State of California or forming a partnership. While formal business entities offer many advantages (most notably protection of personal assets from liability), many new business owners prefer partnerships because of the ease of formation and the maximum flexibility in operations. This article focuses on the partnership. However, it is prudent to consult with an experienced San Diego partnership lawyer and accountant regarding the benefits of a more formal business entity before moving forward.
Although California law does not require a written partnership agreement, there are significant risks associated with informal oral agreements to form partnerships. If after careful consideration, the prospective partners opt to go with the partnership, there is little doubt that a written partnership agreement should be entered into. A written agreement of some sort is an essential part of any good business venture. A well drafted written partnership agreement helps insure that there will be no future misunderstandings regarding each partner’s intent. Often, partners rely on the default provisions governing partnerships under California law without realizing that many of these default provisions are inapposite to the partners’ expectations. Or in some cases, the partners will merely rely on oral agreements to deal with key provisions. However, enforcing oral agreements comes with a host of problems that can result in significant future conflict. See “Why Oral Partnerships Are a Bad Idea“. California’s Revised Uniform Partnership Act (RUPA) sets forth the default rules that govern oral partnerships.
Important Provisions in Partnership Agreements
A complete analysis of every possible provision in a partnership agreement is beyond the scope of this article. However, there are key issues that prospective partners should pay particular attention to:
- Limitations on Outside Pursuits: It is common for partners to commit varying amounts of time towards the operation of the business. Some maintain full time employment while committing resources and after hour time towards operation of the partnership. Others maintain partnership interests in other business ventures. A well-written partnership agreement will address whether these options are permissible. Whatever the case, the partnership agreement needs to clearly delineate each partners obligations and limitations with respect to time and resources towards business operations.