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A Written Partnership Agreement is a Must

(Even for Christian Partners who trust each other)

Does the law require a written partnership agreement?  No.  In fact, in California (and most other states) you can legally form a partnership orally (verbally) with no written agreement.  Just a firm shake of the hand will do according to some.  However, this old-fashioned or laid-back approach has a number of shortcomings.  Here are just a few:

1. “We did not agree to that!”  People often remember differently what was verbally agreed, especially as more time passes.  This can lead to serious disputes.  Disputes can lead to long, expensive court battles.  A written partnership agreement avoids this frequent problem.

 2. “I did not mean that.”  People often interpret what was said differently.  A carefully crafted written agreement can avoid this dilemma.

 3. “What happens when a partner dies or departs from the partnership?”  When this event occurs, if you don’t have a written partnership agreement, you’re looking for trouble.  For example, does the partnership dissolve or continue without the departing partner?  If the partnership does not dissolve, how do you deal with the departing partner’s ownership share?  If the remaining partners want to buy out the departing partner’s ownership share, how will that process work?  If a voluntary agreement as to price and terms can’t be reached, is there a default method of determining the price?  Will the departing partner be paid in full immediately or over time in installments?  If the partner is paid in installments, what, if any, interest will be charged?  If the partnership dissolves, can the partners start a new partnership?  Does any partner have a right to use the partnership’s valuable and familiar name?  May the departing partner start a competing business next door?  Without a well-written partnership agreement, you may have a dispute that turns into a long, time-consuming, very expensive litigation and court battle.

 4. You lose control and flexibility on how to operate the partnership.  Without a written agreement, partnership law normally applies by default.  California law (or the law of your state) may work well for your partnership or it may not.  In many areas, you can craft a written agreement that works best for your business even though it varies from California (or other State) law.

 To sum up, legally, you can verbally create a partnership.  But practically speaking, you need a written partnership agreement.  A written partnership agreement will, almost assuredly, ultimately save you time, money, and headaches down the road.  

Copyright 2007. Tozer

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Disclaimer: The information provided in this article is informational only. The subject matter and applicable law in all legal areas is in a constant state of change. Laws vary from state to state. No legal advice is given and no attorney/client or other relationship is established or intended.


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