With many of my clients recently expressing the desire to bring on a business partner, I thought I’d reach out on the subject. If you find yourself ready for this next step, you’ll want to create a partnership agreement to streamline the business and mitigate potential problems down the road.
Here’s a little bit about these agreements and why they are important.
What is a partnership agreement?
A partnership agreement is a document drawn up by an attorney that spells out exactly what role each partner will play in the business and how responsibilities, privileges, and profit sharing will be addressed. It also outlines what happens in the event of a death or removal/withdrawal of one of the individuals.
Why do you need a partnership agreement?
In most states, there are laws that govern partnerships. If you don’t have your own partnership agreement tailored to your business, along with the nuances specific to your industry, location, and expertise, your business partnership will fall under the governing laws of your state. It is always preferred to create and maintain your own agreement to ensure your business runs as seamlessly as possible and that all issues can be resolved quickly and with ease.
What is in a partnership agreement?
A partnership agreement includes rules and governances that cover potential issues and the day-to-day duties of all partners. Below is a brief list of some things you should include in your agreement:
- Profit sharing, loss allocation, and withdrawals. There are many ways to handle the allocation of both profits and losses. For example, will they be added or subtracted from each partner’s percentage of the business? Some businesses allow partners to withdraw profit funds throughout the year, while others wait until the end of the year to discuss the profit margin and its distribution. Financial decisions such as these should be decided upon beforehand and clearly lined out in your partnership agreement.
- Decision making. Who has the final say when a decision needs to be made? Is it decided by a vote? Will major decisions be handled differently than minor decisions? If so, how will you determine which decisions are minor and which are major? Answers to all of these questions should be in your agreement so there is no ambiguity when it’s time to make a decision.
- Dispute resolution. I have handled many cases over the years where disputes erupted into problems that could have been mitigated if the partners had been proactive in deciding how these issues would be addressed. Providing options other than court in your agreement, such as mediation, can save the business time and money. It can also save a business relationship that you might need later.
These are just a few highlights you should include in your partnership agreement. A typical partnership agreement will also include language about respective contributions to the partnership, duties of each partner, how to add additional partners, how to create a business name, and more.
If you have any questions about expanding your business or creating a partnership agreement, please give me a call. I would love to chat more about how you can take this next step with confidence.
Chuck Dorwart