Smith + Schwartzstein
Located In Morristown, NJ and New York, NY

The importance of a solid partnership agreement

Forming a business partnership can be an exciting venture. Whether your partner is a childhood friend, your old college roommate, a family member or a former colleague, a partner in business can help ease the load and bring strengths and skills to the business that you don't have.

If you don't know the person you're considering partnering with very well, do a thorough background check. Find out if the person has a criminal record, has been the defendant in any lawsuits or has had any judgments against him or her.

When setting up the business, remember that no partnership is always smooth sailing. There will be disagreements along the way -- sometimes serious ones. One of the most common sources of conflict involves monetary disputes. There are various types of monetary disputes. Many can be prevented by having clear ownership rules from the beginning.

Often, one partner is in charge of the business operations while the other handles the money. However, it's essential that the partner who's not in charge of the financial side of the business be required to approve all expenditures. This includes operating expenses and salaries as well as shareholder and profit disbursements.

Profit disbursements impact how the business is taxed. Therefore, they should be addressed in a partnership's operating agreement. As one attorney notes, "It makes sense to keep profit and cash in the business, but not at the expense of the partners. Having it in the rules upfront takes one source of worry and possible discord away."

Having both partners in the loop on all financial matters can help prevent embezzlement. While you may think your partner is incapable of such a thing, embezzlement is actually the most common monetary dispute in partnerships, according to the attorney quoted above. This can occur in the form of inflating expenses or converting personal accounts to business ones, just to name two examples.

By putting a well-crafted partnership agreement in place at the beginning of your new business endeavor, you minimize the chances for costly disputes later on. An experienced business and commercial litigation attorney can help you do that.

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