Limited Partnership Agreement: Time for the Pre-nup

Nobody goes into a business venture with the thought that the partners will have a falling out, anymore than one gets into a marriage thinking about the divorce. And yet, business partnerships will fail more than 60% of the time – and the divorce can get ugly!

A limited partnership agreement helps partners in a company define the rules as to how the company will be run in all conceivable situations.  This includes specifying their roles in the company, who will do what, how the profits and losses will be split amongst partners, what to do in case of a disagreement, or the death of a partner, etc.

The rules can be fairly simple but almost always includes who-does-what. Defining roles of founders up front can save a lot of headache down the line – for example, one partner might be in charge of operations, another marketing, and the third, fundraising for the new venture. The three can simply own 1/3 of the shares and receive 1/3 of the profits (or losses if all does not go well). From here, things can get complicated – for example, what if the partner in charge of fundraising does not meet his goals. Worse yet, he does not raise any money at all. Does he give up some of his equity or his share of the profits?

Voting rights also go into a partnership agreement. For example, there might be limited partners who invest in the company but do not get a say in the day to day business operations. So while they own shares in the company, they might not have proportionate voting rights.

But simple or complex, starting out with a well thought out and properly worded Partnership agreement early on in the game can protect against rocky times, if things do not go as planned!