After you have chosen the perfect business partner, it is essential that you cover all your bases when you set up your partnership agreement. If you can afford an attorney, it is a good idea to have one draft of the agreement. At the very least, you should hire an attorney to review the partnership agreement before you sign it to ensure your interest is covered.
What Is The Purpose Of A Partnership Agreement?
This agreement has many purposes but the two most important purposes are dispute resolution and the business structure. Even the best relationship has disagreements especially when there are a lot of decisions that need to be made. When your partnership agreement is crafted carefully, it will outline exactly how disputes will be handled before they happen, instead of in the heat of the moment.
In addition to providing dispute resolution, the partnership agreement forces the partners to think about how the business is going to run and be structured. This can minimize potential misunderstandings and get everyone on the same page from the beginning.
Critical Elements That All Business Partnership Agreements Must Have
Business Name: The name that the company will be operating under.
Purpose: A broad statement of the business’s purpose. Leaving the purpose broad will provide flexibility for the company to adapt over time.
Workload Structure: The partnership agreement should include how the workload will be shared. The following questions will help you determine what should be included regarding the partners’ workload:
Partner Contributions: Determine exactly what each partner will be contributing to the business such as cash, physical property (office space, equipment, etc.), and intellectual or other property types (client lists, software codes, etc.). After you have all contributions listed, discuss with the other partners what restrictions there will be on those contributions, if any. The following are some examples of the types of things that should be discussed:
Partners’ Compensation: All partnership agreements should list the terms of each partner’s compensation. The following questions should be discussed to determine what should be included regarding compensation:
Ownership: Now that you have determined the contributions, workload, responsibilities, and compensation, you need to agree on how exactly the ownership should be split. This is a difficult calculation and can cause problems between partners before you even finalize the partnership agreement. Things to consider:
Business Authority: The partnership agreement should state the authority that each partner has. The following questions need to be answered:
Death Or Disability: The partnership agreement should state what happens to the partnership if one of the partners dies or if they become disabled and are unable to participate at the same level. To prevent heirs of the deceased partner inheriting a portion of the partnership, partnership agreements normally include a buy/sell agreement.
Partner’s Exit: The agreement should state the terms of a voluntary and involuntary exit. The following questions need to be addressed:
Dispute Resolution: Even in the perfect partnership, there will be times where the partners are unable to agree about a topic. The partnership agreement should state how disagreements will be handled. That way, when an issue arises, you will know exactly what the determining factor will be. There are many ways disputes can be handled including:
New Partners: The partnership agreement should include the process of bringing a new partner in. How will it be decided? Majority vote?
Selling The Business: What are the exact circumstances that the business can be sold? This will probably be included in the Buy/Sell Agreement.