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Partnership Agreements

ELIOT WAGONHEIM: It is a lot different having one person meaning yourself, than it is having three people to divide up the work and divide up the revenues and divide up the control of the business. If you have partners, very often a legal document and the consultations with the lawyer are the things that are going to enable each person to make sure that their expectations are the same.

EDWARD JACOBSON: We need to sit down and we need to figure out, how much of this business do I own? How much of this business do you own? And how will we be splitting our profits?

ELIOT WAGONHEIM: And each partner also needs to know what happens if I want to leave or what happens if, you know what, I just do not think the other person is pulling his weight. In that case, the only solution I can think of this is to have a legal document that spells out the best case and the worst case scenarios.

FRED PROVORNY: What happens in the event the partners disagree? How do you resolve those kinds of disputes.

ELIOT WAGONHEIM: I was very good friends with somebody with whom I purchased a house. He said, "you know, we should have a contract on this to see if one of us wants to sell, how we value it," that sort of thing. And I was the lawyer, and I was saying, "you know what, I really do not think that is necessary. We have known each other for 30 years.

EDWARD JACOBSON: Wrong! Get those issues out on the table now, know what is going to happen before there is money on the table.

ELIOT WAGONHEIM: Well, he prevailed upon me and I drew one up and it was a three page agreement. And five years down the road, we did wind up selling the house and it turns out we had different ideas about how to value the investment. We could refer to our legal document. We are still very good friends now. Had we not had that legal document, I am not sure I would be able to say that we would have preserved the friendship.

FRED PROVORNY: You may have the best of intentions and he may be your best buddy, but things happen down the road where you have disagreements.

EDWARD JACOBSON: The time to work out these issues is before there is any money on the table, before there is any success in the air.

FRED PROVORNY: It is always best to have an agreement in place that deals with contingencies that might arise.

EDWARD JACOBSON: Get the stuff in writing. Contact an attorney. Get it memorialized. Get everybody to sign off on it and then good luck to you as you go out into the business world.

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TRUE OR FALSE: "Partnership Agreements are Unnecessary"

True and False.

Legally speaking, you don't need to file anything, draft anything or sign anything to set up a valid partnership. Just start doing business with another person and, wallah, you've got yourself a partner and a legal partnership.

Oh, and you now have one or more persons in your life that can ruin your life. That's right. You are personally liable for partnership losses -- including those created by that dimwit of a partner you have.

That's why you want the legal protection of a carefully considered, well-drafted partnership agreement. Even though the law doesn't say you have to do one, you'd be wise to have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, and what steps will be taken to dissolve the partnership when needed.

Drafting and negotiating the partnership agreement will force you and your partners to confront serious issues about how you're all going to run, fund and profit from the business. This process will either make your partnership stronger, or convince you that you really don't see eye-to-eye with your prospective partners after all. Either way, you and your partners win in the process and the legal fees incurred can save your financial life down the road.

Law Can Be Stranger than Fiction

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