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Partnership Agreements Keep Farm Siblings From Suing Each Other
Whenever two or more folks are involved in running a business, such as a farm, there is added complexity and risk.
I talked to a farmer recently who was telling me about the farm that he and his siblings will inherit. Only one of the four siblings farms, and he wants to continue for the foreseeable future.
The dad of the siblings lets the active farmer pay a discounted cash rent, but that’s not going to work for the other siblings after Dad passes.
In short, trouble ahead.
How do you head off troubles and disagreements amongst partners? A partnership agreement. For a corporation, it’s called a shareholder agreement, and for an LLC it’s typically called an operating agreement.
They all serve the same purpose, but for this article, I will generically call them all partnership agreements.
Time and time again, I have seen two people fire up a company with each owning exactly 50%. Sometime down the road, they reach a deadlock on a key business decision or someone wants out of the business.
One of them will approach me with the question, “What do we do now?” I will ask, “What does the partnership agreement call for?” The answer is normally, “We don't have one.” The look on his or her face is embarrassment and dread.
At that point, everybody is hiring a lawyer and scrambling to defend their position. Unfortunately, a lawsuit amongst family members or friends typically spells the end of those family relationships or friendships.
No one goes into a partnership expecting to have a $1 million disagreement with his sister, cousin, or best friend. No one goes into a partnership expecting to have a divorce, car accident, or personal bankruptcy. Yet, life happens, and the unexpected comes.
If you sit down and think about possible partnership problems, you can cover most of them with a written agreement, which should be reviewed by a lawyer.
Tip: You can save money by drafting it yourselves in advance. Just start with a sample agreement from another partnership, which you can find online or borrow from another business owner.
In my opinion, here are 10 basic questions that should be answered in every partnership agreement:
- How will business decisions be made and by whom?
- When will money be distributed to the owners?
- When will capital be contributed by the owners and how much?
- Who will keep and have access to the books?
- What happens upon the death or incapacity of a partner?
- What happens if someone wants out of the partnership?
- How much will be paid to the exiting partner?
- Who can buy or sell the business’s assets?
- What are the consequences of breaking the agreement?
- What is the process for resolving disputes?
Besides delineating rights and responsibilities for the partners themselves, there are other parties who are interested in the agreement.
Usually, when you go about borrowing money from a bank, the lender will ask for the LLC operating agreement.
If your widow or heirs are trying to resolve your estate, they will need the agreement with your surviving partner to orchestrate some kind of sale. In a divorce case, the attorneys and judge will want to see the agreement.
Beyond the initial agreement, circumstances change over time. New partners enter into the operation, and old ones leave. The number of heirs increases or decreases. For these reasons, you will want to review the agreement every few years.
One of my partners likes to have spouses sign partnership agreements, too, to be sure that all interested parties are aware of the rights, responsibilities, and duties of the partners and their heirs.
Note: Shawn Williamson is a CPA with Fick, Eggemeyer, & Williamson CPAs in St. Louis, Missouri.