Becoming Partners? Draft and Sign Partnership Agreement First

In general, a partnership can be created when two or more persons, or entities, or a mixture of both, agree and cooperate to provide a product or service in the Massachusetts commercial marketplace. Typically, partners will share the profits and losses of the partnership, and contribute labor resources, intellectual property, business infrastructure, real estate or other intangibles to the partnerships. A partnership does not require a formal agreement or registration as a formal entity with the Massachusetts Secretary of State, Corporations Division.

If partners do not sign a partnership or operating agreement, then Massachusetts state statute will control the operation, management and issue resolution for the partnership. Massachusetts law concerning partnership can serve a a default set of rules unless partners adopt a specific written agreement.. For example, Massachusetts General Law ch. 108 will govern partnerships, ch. 109 will govern Limited Partnerships, and ch. 156D will govern Limited Liability Companies (LLCs). In other words, if you do not adopt a partnership agreement for your business then state law will decide the outcome of any issues that may arise during operations.

It is, therefore, important that you work with a business attorney to draft a comprehensive and robust partnership agreement. This agreement will protect both partners’ interests, rights, and contain a set of operating rules for the partnership. This agreement is also very useful is resolving or setting up a formal process should a dispute arise between the partners. If partners do wind up in litigation, a Court or Arbitrator will always look to the partnership or operating agreement first before deciding any issues.

If you are interested in speaking with a Boston / Lynnfield business lawyer, we can be reached at 781-463-6063.

Informal Partnerships Can Lead to Litigation

Partnerships are difficult endeavors for the majority of business owners and investors.  Informal (or handshake or gentlemans' / ladies' agreements) are sometimes ordinary practice when two or more individuals decide to enter into a joint business venture. When going into business with a relative, long time friend, or work colleague, it may appear to be a good idea to rely on these types of informal agreements, however, when problems arise for the business or the individuals partners individually, that close relationship may be relegated to irrelevance. 

Most, if not all, Massachusetts legal practitioners would recommend against informal partnerships, and instruct their client to form a Limited Liability Company (LLC). Unless a formal entity is registered in Massachusetts and unless the partners decide to conduct business under the LLC, both partners will be personally liable for the debts and liabilities of the partnership. In other words, if the partners incur debt or face the prospect of a legal claim, each partner will put at risk their own personal assets and income.  Also, what happens if one partner commits an unlawful act or injuries another party in commerce, and is subject to litigation? Without any form of limited liability, the other partners will also be liable for those actions. 

Additionally, what happens when the partners decide to part ways, and when there is a dispute over ownership, buyout, rights to intellectual property, or continuing use of customer lists, or other goodwill? What happens if the partners are unclear about the management and/or daily duties, time commitment, financial investment requirements, or transfer of ownership?

Without some type of legal entity structure or written partnerships agreement, informal business partnerships may expose partners to unnecessary (and costly) liabilities and litigation. If you are considering forming a new business partnership in the Boston and North Shore areas of Massachusetts, please contact the Law Office of Stefan Cencarik, PLLC at 617-669-9780 for a consultation.