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Photo of Michelle Cohen Levy

Why is it important to have a partnership agreement?

On Behalf of | Aug 31, 2020 | Business Law |

Many people in the Fort Lauderdale area go into business with others who have similar dreams and ambitions.

Oftentimes, business partners are trusted family members or long-time friends. In these circumstances, a South Florida entrepreneur may wonder whether she really needs to sign any kind of formal agreement to solidify the ground rules of a partnership, particularly if the partnership is an informal general partnership.

Some may be reluctant to set up an agreement if the partnership is technically a more formal business structure, like a closely held S corporation or a limited liability company.

Without an agreement, Florida law governs a general partnership

What people might not realize is that Florida has laws in place which govern how partnerships will operate in the absence of an agreement.

While this is not always a bad thing, the problem with these laws is they are one-size-fits-all and might include rights and responsibilities that just are not suitable to a business’s unique situation.

Moreover, the laws can be complex and can lead partners straight to the courthouse should a relationship sour. Costly and time-consuming disputes have led to the downfall of many partnerships, and it can even hit the personal finances of the individual partners.

A well-drafted partnership agreement ensures the relationship goes smoothly

A properly drafted partnership agreement allows partners to decide for themselves how they want to conduct their business with each other and how they want to handle disputes.

Perhaps more importantly, the agreement also can specify how partners will split profits and who will perform what business functions. The agreement also can explain how a buy-out or a dissolution of the partnership will work.

Laying down these ground rules may take a little time and cost upfront, but the investment can stave off serious legal problems down the road.