Partnership Contracts – Why You Need One

I’ve participated in over 3,000 real estate investing deals, many with one or more partners. In fact, partnerships have been one of my most valuable tools for expanding my business and dramatically increasing my profits. With the right partner(s) I can do more business and better business, and both of us will make more money!

I have not always used a contract – I’ll admit that up front! Many investors of integrity and common sense actually avoid using contracts, feeling they are overly complicated, expensive, time-consuming and restrictive. They may also believe that a contract isn’t worth much anyway unless the other party is also a person of integrity. I acknowledge these thoughts – up to a point!

There are some very good reasons to protect the partners with a basic, boilerplate contract that covers the things that could be the most damaging if they go wrong.

What happens if … 

… the partners can’t agree on important business decisions?
Answer: Without a contract clause specifying how such stalemates are to be resolved (mediation, arbitration, etc.), or specifying how the partnership can be dissolved, you could both find yourselves stuck in a bad business situation – or embroiled in an attempt to divide debts and assets so you can go your separate ways – or, worse, suing each other. 

… one partner suffers an unexpected disability, or even death?
Answer: In most states, without a contract, a partner’s death means the partnership automatically dissolves and the heirs can claim the deceased partner’s share. Disability may mean a partner needs to withdraw. A contract should address these contingencies.

… one partner has an unfavorable court judgment due to a divorce, bankruptcy, or a lawsuit unrelated to your business?
Answer: Without a contract clause specifying how one partner can claim their share of the partnership, or exit altogether, a judge could require full or partial liquidation of your partner’s share to settle the judgment.

… unknown to you, your partner gifts all or part of their share to someone else?
Answer: You have a new partner. Unless a contract clause addresses how new partners may (or may not) be added to the partnership, and how any partner may distribute (or not) his or her share.

Things change – for individual partners, and for the partnership. Above are just a few of the stumbling blocks that can trip up even a good partnership.

 The most important role of a contract is to set boundaries and limits, determine how serious disputes are to be settled, provide for a partner’s exit or claim on partnership assets, and to define what happens in the case of a death or disability – all without ruining the partnership.

It’s estimated that the majority of all business partnerships do not have a contract. Are you concerned about the lack of a contract in your partnership?

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