Clauses to Include in Business Partner Agreements

People enter into business partnerships with friends, coworkers, and family members every day. At the start of the business, as with the start of most relationships, it’s hard to imagine the many ways things could go wrong. However, conflicts among business partners are fairly common, as reflected in the fact that many attorney dockets are kept busy working through business partner dissolutions.

To help protect the company, as well as each partner’s individual interests, it is important to document the obligations owed among the partners and between each partner and the company whenever people go into business together. Such issues are much more difficult and costly to work out after issues arise.

A business partner agreement (“BPA”) is typically memorialized in a company agreement (for a limited liability company), a shareholder agreement (for a corporation), or a partnership agreement (for a legal partnership). There are several clauses you should consider incorporating within your BPA.

Critical Clauses in Business Partnership Agreement

To help ensure the smooth operation of the business, significant clauses that should be considered for all BPAs, include:

  • Clauses specifying who directs and manages the affairs of the company.

    • Will the company's affairs be directed and managed by all owners, some owners, or non-owners?

    • How is a quorum established for decision-making?

    • Do all decision-makers have an equal vote?

    • Can decision-makers be removed? If so, what is the process for removal, and how are vacancies filled?

    • Do any decisions require a supermajority or unanimous vote?

    • How are deadlocks avoided?

    • How are meetings of decision-makers scheduled?

    • Can decisions be made without a meeting? Can votes be cast via proxy?

  • Clauses specifying how owners transfer or lose their interest in the company.

    • Will other owners need to approve of the transfer? If so, are there any exceptions to this requirement (for example, transfers to a family member)?

    • How is the interest of a company valued? Are there required payment terms?

    • Will owners have a right of first offer or right of first refusal?

    • Are there any restrictions or requirements for new owners to buy into the company (for example, do other members need to approve of any new owners)?

    • What happens to an owner’s interest upon their death or divorce?

    • Can an owner be forced to sell their interest (if, for example, their employment with the company is terminated or they go into bankruptcy)? If so, how will they be compensated for their interest?

    • Can an owner withdraw from the company? If so, what are the financial consequences of withdrawal?

  • Other issues.

    • Who decides how profits are disseminated to and allocated among owners?

    • How is the company taxed? Can the taxation election be changed? If so, how?

    • Do decision-makers owe any specified fiduciary duties to the company or each other?

    • Are the owners or decision makers subject to any restrictive covenants (for example, a noncompete agreement)?

    • Is a plan outlined to describe steps to take if the owners can no longer work together?

    • Do owners have preemptive rights?

    • Are there any liability limitations or indemnification rights applicable to owners, decision-makers, or others?

    • When is winding up and termination of the company permitted or required? How is the company’s winding up and liquidation handled?

If you are working on drafting a BPA for a Texas LLC, consider referring to this checklist to ensure many issues outlined here are addressed within your BPA. Regardless of whether you use this tool, take time to plan for potential contingencies before they arise, and be sure to work with an attorney to help craft your BPA.

This update is for informational purposes only and does not provide legal advice. Every legal situation is different and must be independently analyzed by an attorney. Please consult with an attorney for specific guidance.

About Luna Law, PLLC

Luna Law, PLLC, provides a wide array of legal services to small businesses, from the creation of corporate entities and contract negotiation to employment counseling, risk mitigation, and compliance with local, state, and federal regulations. Contact the firm for a consultation or visit RachelLunaLaw.com for more information.

Business LawRachel LunaLimited Liability Company, LLC, agreements, Entity formation