What Happens If You Don’t Have a Partnership Agreement In Arizona?

Partnership Handshake

If you have a partnership in Arizona – whether it be a general partnership, limited partnership, limited liability partnership, or limited liability limited partnerships – it is strongly recommended that you have a partnership agreement.  A partnership agreement is like an instruction manual that lays out the rights and responsibilities of the partners, as well as how to handle disputes, the death or disability of one of the partners, or an ownership change. 

Although a written partnership agreement is not required in Arizona, we strongly recommend one to help keep everyone on the same page and prevent confusion and mistrust. Not having an agreement can also lead to more serious problems, including liability to third parties and lawsuits between business partners.

A partnership agreement does not need to be complicated. It should, however, spell out what each partner is expected to contribute, how the day-to-day operations will be handled, and other important terms. We discuss some of these in more detail below. 

The Partnership’s Duration

Many partnerships do not have a specific duration and are meant to continue indefinitely. However, if the partners plan to dissolve their partnership after a certain period of time or after a certain milestone is reached, the agreement should specify that.

The Partners’ Responsibilities and Contributions

One of the most important things to include in a partnership agreement is an explanation of each partner’s responsibilities. Every partner should know exactly what is expected of them.

Along the same lines, a partnership agreement should also state each partner’s contributions in terms of money, property, and/or services. This is important partly because a partner’s contributions often determine their percentage of ownership.

In addition to specifying contributions, the partnership agreement should explain what happens if a partner fails to live up to their commitments. It should also state where additional resources will come from if the specified initial contributions turn out to be insufficient, or whether the partnership will simply end at that point.

How Decisions Are Made and Disputes Are Resolved

The partnership agreement should clearly detail how important decisions regarding the partnership are made, both to keep things running smoothly and to help avoid disputes. In particular, the agreement should explain voting procedures and who has the authority to contractually bind the partnership under what circumstances.

An explanation of binding power is important to help avoid disputes that may arise when one partner takes out a loan or otherwise attempts to bind the partnership to a contract that the other partners may disagree with. 

Because disputes are unavoidable, the partnership agreement should also discuss preferred dispute resolution methods. This could be through mediation, for example.  

How Partners Are Compensated 

The partnership agreement should lay out how each partner will be compensated, whether that is through salaries or distributions. If salaries will change over time, the agreement should explain how. If partners will receive distributions, the agreement should state each partner’s percentage. 

Procedures For Changes In Ownership

Because that the partnership may bring on new partners at some point, the agreement should state how this will be accomplished. For example, how will recruiting be handled? Will new partners be required to sign a non-compete or non-solicitation agreement? 

If a Partner Dies, Becomes Disabled, or Retires

It is important for a partnership agreement to clearly explain what happens if one of the partners dies, becomes disabled, or retires. This includes who will assume that partner’s responsibilities temporarily or permanently, who will inherit a deceased partner’s shares, and whether a deceased partner’s beneficiaries will have any input when it comes to the partnership.

Relatedly, the agreement should discuss what happens if a natural disaster or some other catastrophe destroys partnership assets.

If the Partnership Is Dissolved

In case the partnership is dissolved, the partnership agreement should specify things like how related legal expenses will be shared and how any remaining assets or profits will be distributed.

Contact Counxel Legal Firm

If you would like more information about partnership agreements or help creating one, contact us at (480) 744-6621 or at request@counxel.com. Don’t forget to check out the good things that others are saying about the services they received from Timothy Coons on Google.

This article is intended for informational purposes only and does not constitute legal advice for your specific situation. Use of and access to this article does not create an attorney-client relationship between you and Counxel Legal Firm. Please contact request@counxel.com or (480) 744-6621 to request specific information for your situation.

*Conveniently located off the 101 Freeway and the US 60 in the middle of Phoenix, Scottsdale, Tempe, Chandler, Gilbert, Mesa, and Queen Creek!

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