A business partnership agreement is an important legal document that new business partners can use to outline the terms of the partnership, the responsibilities each person will have and their shared goals for the future. It can help to prevent misunderstandings and disputes, and it can provide a structure for making decisions.
On top of that, a partnership agreement offers protection. It protects the business in many ways, and it can protect each partner’s investment – whether that means time, money or both.
Key considerations
When individuals band together to start a partnership, it’s usually wise to have an agreement or a contract from Day One. Here are key elements that should be addressed in a comprehensive partnership agreement:
- Partners’ Contributions: Clearly outline each partner’s initial financial contributions, assets, intellectual property or any other resources brought into the partnership. This includes cash, property, equipment or expertise.
- Ownership and Equity Distribution: Define the percentage of ownership and how profits, losses and distributions will be shared among the partners. It should include provisions for changes in ownership over time, such as adding new partners or having existing partners leave.
- Responsibilities and Business Roles: Go over the specific roles for each partner, their direct duties and their key responsibilities within the business. This includes management roles, the division of decision-making power and day-to-day operational duties.
- Decision-Making Processes: Speaking of making decisions, the agreement can specify how the partners will make any significant business decisions. Outline whether decisions will require unanimous consent, a majority vote or if certain partners have decision-making authority in specific areas.
- Financial Matters: Address financial management, banking arrangements, accounting practices, financial reporting and how financial records will be maintained and accessed by partners.
- Dispute Resolution: Include procedures for resolving any disputes that may happen in the future, helping things go more smoothly at that time.
- Exit Strategy: Define procedures for the departure of a partner, whether due to retirement, resignation, death, disability or other reasons. Address what to do when it is time to dissolve the partnership or close the business entirely.
When starting a partnership, it’s wise to use a legal contract from the beginning. Otherwise, individuals – and the investments they’ve made – could be left unnecessarily vulnerable.