When embarking on a business partnership, it is crucial for parties involved to have a clear idea on what their role is and the processes and steps for different situations that may arise within a business. The following things should be considered when creating partnership agreements:
Make sure you clearly lay out each partner’s stake in the formation and ongoing finances of the business. How much will each partner contribute to start the business and what will each partner’s responsibilities be for future needs? Contributions not only include money but time, effort, customers and equipment.
Your partnership agreement should detail how the partners will split your business profits? How much will each partner get paid and who will get paid first? Define if each partner will be paid a salary (and of course how much that salary will be).
What if changes begin to occur in regards to ownership? If you sell it, which partners will get what? What is your partnership’s position on taking on new partners? If one partner wants to withdraw from your business, what happens then? What are the options for buying out another partner? Your agreement should carefully describe how ownership interests would be handled in various scenarios like those and others, such as in the event of any partner’s death, a retirement, or bankruptcy.
You and your partner(s) will not agree wholeheartedly about everything. You need to define how day-to-day management and long-term decisions will be made. Who gets the last say? Identify what types of decisions require a unanimous vote by partners, and what decisions can be made by a single partner. Doing this, you’ll have the foundation for a more friction-free business.
How will disputes be handled? Your partnership agreement should define the resolution process. Should mediation be the initial step? Will you require arbitration to settle differences? Keep in mind that if a dispute goes to court, lawsuits become part of public record.
Sometimes, the unexpected happens. Your partnership agreement should address possible scenarios and concerns, such as:
-A partner getting sick or dying—What happens then?
-A buyout—How will the business be evaluated (and what is the split) if an offer is laid on the table?
-Circumstances under which you can modify your partnership agreement—and the process for making changes.
These are the most common issues. And there are numerous others you should think about.
Your agreement should also include what steps should be taken to legally end your partnership. Research what your state requires to dissolve partnerships. State law governs dissolution and your state’s website should define the process and provide the forms you need to complete.
Developing a partnership agreement takes some time and some money, but it’s well worth the peace of mind to know you and your partners are on the same page and have the same expectations and understanding about how your business will operate.