Partnership agreements

Business Formation

A partnership exists when people act like partners.

Texas law can find a general partnership from conduct: sharing profits, participating in control, contributing money or property to a common enterprise. No filing is required and no document is needed. The consequence is that each partner can bind the business, and each is personally liable for its obligations — including obligations the other partner incurred without asking.

What the agreement has to settle

• Contributions. Cash, property, equipment and labour — with a value put on sweat equity in writing rather than remembered differently later.
• Ownership and profit shares, which do not have to be identical to each other.
• Decisions. Which decisions are unanimous, which are by majority, and who runs day-to-day operations.
• Draws and distributions, and what happens when the business needs capital nobody planned for.
• Roles and expectations, including what happens when one partner stops doing the work.
• Exit. Voluntary withdrawal, death, disability, divorce and expulsion — with a valuation method fixed in advance and payment terms the business can survive.
• Deadlock. A tie-breaker, a buy-sell mechanism or a shotgun clause, so a 50/50 business does not simply stop.
• Restrictive covenants and confidentiality, drafted to Texas standards on scope, time and geography.

Limited partnerships

A Texas LP separates a general partner with control and liability from limited partners who invest without managing. The structure is common in real estate and investment ventures, and the protection for limited partners depends on staying out of control of the business — which is why the agreement and the actual conduct have to match.

How profits are actually split

There are two common bases and they produce very different businesses. Splitting by ownership percentage is simple and predictable. Splitting by performance or by the responsibilities each partner carries rewards the work but needs a definition of what counts, agreed while everyone still thinks the arrangement is fair. Whichever you choose, the agreement should also say how losses are allocated, when draws are permitted, and what happens when the business needs capital that nobody planned for.

Changes in the partnership

• Adding a partner. Who must approve it, on what terms, and what happens to the existing percentages.
• Additional contributions. Whether partners can be required to put more in, and what happens to a partner who will not or cannot.
• Voting. One partner one vote, or votes weighted by ownership — and which decisions need unanimity.
• Removing a partner. The conditions that permit it, who decides, and the process that has to be followed.
• Buyout. The trigger, the valuation method and the payment terms, fixed in advance so that the price is not being negotiated by people who have stopped speaking.

What happens without an agreement

• Conflict over who was responsible for what, with no document to settle it.
• Exposure to liabilities a partner took on without telling anyone.
• No mechanism for removing a partner who has stopped contributing.
• Lawsuits between partners, which are among the most expensive disputes a small business can have.
• Disruption or failure of the business itself, usually while both sides are still insisting they are in the right.

When a partnership is already breaking down

We also litigate these: claims for breach of the agreement and of fiduciary duty, accountings, misappropriation of opportunities or funds, wrongful expulsion, and dissolution and winding up. The first practical step is usually securing records and accounts before they become unavailable, and the second is an honest valuation of what is being fought over.

Common questions