The main benefit of a partnership – its flexibility – can also become a liability when a major change occurs like deciding to bring someone new on board as a partner. The partnership agreement may not have been worded well enough to handle the change, and it could lead to conflict. In a state like California, which like most has passed the Uniform Partnership Act, if a partnership agreement is silent on a matter, state law – often contract law – fills in the holes, which may not lead to a welcome result. To avoid problems when bringing a new partner on board, partnerships and similar business entities should have clear provisions in their operating agreements.
To bring someone new into a partnership, it is common for the partnership’s partners to have to vote the new person in and for the new person to contribute to the partnership at least as much as the original partners did; otherwise, the new partner has less on the line. Partners can agree to a unanimous vote or some lesser majority being required in order to bring someone into the partnership. Both sides – the partnership and the incoming partner – should be familiar with the partnership agreement before agreeing to the change.
Partnerships may want to bring someone on board gradually instead of immediately granting him or her the same status as the other original partners. For this reason, it can be a good idea to build certain contingencies into contracts for new partners like the following:
- Stake in the partnership increases after each year so that the new partner has to work a number of years to obtain general partner status
- A clause that makes the partnership offer revocable under certain conditions and up until a certain date
- Performance-based incentives that can tie into a better share of the partnership’s profits, for example
Are you involved in a partnership or similar business entity? What procedure do you use to bring a new partner on board?
Klein Trial Lawyers – Los Angeles business litigation lawyers