Legal Definition of Partnership not Enough

It is very common for entrepreneurs to take on partners.

They may be co-founders of the company, key personnel who are given an ownership stake as part of compensation, family and friends who offer some startup support or outside investors.

In any of these circumstances, these people become owners of the business.

And the foundation of working with a group of owners should be a sound legal agreement among all the owners.

This agreement should lay out the basic rights and responsibilities among partners as it pertains to the business they own together, such as what decisions are required to be voted on, what happens when a partner leaves or passes away, and what information those who run the business must provide to the partners.

The best time to set up a partnership agreement is when you first start the business. At this point in time, there is little to squabble over. The business exists only on paper, so finding a fair way to deal with an exiting partner seems much easier.

But such a document only lays out the minimum requirements. There should also be an ethical set of standards that goes beyond the basic legal requirements.

This is particularly true for those in the partnership who have ownership control by holding a majority of the shares.

The heart of working successfully with partners of any kind is communication.

Many partnership agreements establish the minimum requirement of providing everyone with annual financial summaries and holding an annual formal meeting. While this meets the legal requirements of most agreements, it falls short of commonly accepted ethical standards.

Communication with fellow owners should be frequent and predictable. Common practice is that the managing partner should ensure that every owner gets a monthly set of financial statements. It is also good practice to include a narrative summary of business activity over the past month.

If there are partners in the business who are not actively involved in running the company, quarterly or monthly meetings are a good way to keep everyone informed. These also allow for discussion of important issues.

Communication with partners should always be completely honest, open and proactive. The managing partner should view his or her role as a steward of the company for all of the ownership.

With that comes the responsibility of keeping everyone informed of major accomplishments and significant problems or crises. This type of communication shouldn’t wait for the monthly report.

Partners should always be among the very first to know about such things.

Communication should be comprehensive. While monthly reporting may provide a fairly succinct summary, at least once a year partners should be given a thorough overview of the business’ past, present and future.

Too often partnerships that are guided solely by the legal requirements of their formal agreements tend to end up in a legal mess trying to resolve conflicts and disagreements.

Entrepreneurs who view themselves as stewards for the other owners — and who follow a higher standard of communicating — are better able to resolve issues among themselves or avoid such problems altogether due to a strong sense of trust.

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