Write a Partnership Agreement
When you start a business with someone else, you're in a partnership. It's like a team where each player has an important role. A business partnership agreement is an important legal document. This agreement lets everyone know what is expected of them. It's a set of rules for how the business will run and how the partners will work together. Without an agreement, you might have trouble when you make money or if someone decides to leave the team.
If you are currently involved in a partnership or are thinking about starting up a business as a partnership, you should take the time to think about how to write a partnership agreement. Without a set of rules in place, even minor disputes could escalate into major problems that could end up dissolving your partnership. Lastly, if you do not have a partnership agreement in place, your partnership may be governed by default rules set out by the state.
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What a Partnership Agreement Can Do for Your Business
In its most basic form, a small business partnership agreement will give you a firm understanding of the business relationship that you have with your business partners. The partnership agreement will spell out how the business profits will be divided amongst the partners. It will detail the rights and responsibilities of the partners. It also lays out the procedures to take when a partner leaves the business and many other important rules and guidelines.
Remember that if you do not have a partnership agreement in place, your partnership will follow default rules. Generally speaking, these rules are known as the Uniform Partnership Act or the Revised Uniform Partnership Act. Default rules are like a one-size-fits-all shoe, and they probably won't work that well for your partnership.
What You Should Have In Your Partnership Agreement
Although there may be other items that you want to include in your partnership agreement, here is a list of some of the most common and prominent items found in partnership agreements:
- Names and Contributions: One of the first things that you and your business partners need to sit down and agree on is the name of the partnership. Many partnerships often take the names of their business owners, but you can also choose the option of making a fictitious business name, once you make sure that the name is available for use and has not already been taken. You also must decide what each partner is going to contribute to the business as it starts up.
- Business Description: Describe what kind of business you're doing so everyone's clear on what the team is working towards.
- Business Decision-Making: Explain how you'll make big decisions, like if most partners need to agree with a majority vote, or if just one person can decide.
- Share of Profits: Talk about how you'll divide the money the business makes and how often you'll do it. Your ownership agreement should set out how to allocate the profits and losses. The agreement should address whether every partner will be able to take a regular draw or choose to take their entire allocated profits instead.
- Responsibilities of Each Partner: Detail who does what in the business. This way, everyone knows their job. Talk about how you will resolve disputes and handle day-to-day operations and responsibilities.
- Ownership Interest: This is how much of the business each of the partners owns. It's like saying who gets the bigger slice of the pie.
- Leaving the Partnership: Make rules for how a partner can leave and what happens to their part of the business. Include these rules in the written partnership agreement.
- New Partners: There may come a time in your business when you want to bring in new partners. If you can agree on this process at the outset, it will probably be much easier when the time rolls around.
- Dispute Resolution: If you spell out how you will deal with deadlocked disputes at the outset, you can save a lot of money in the future. For example, instead of allowing the partners to go to court, you could require partners to use arbitration or mediation first.
- Ending the Business: Many partnerships have fallen apart when one partner decides to leave, becomes disabled, or dies. Be sure to have a buyout agreement included in your partnership agreement that deals with such situations. This helps the remaining partners navigate the partnership in the event of the death of a partner, for example.
More Considerations for Crafting a Solid Partnership Agreement
When drafting a partnership agreement, it's essential to outline not just the basics but also to delve into the details of daily business operations and the broader business structure. This should include who takes charge of daily tasks and how to handle finances, all laid out in an operating agreement. Equally important is establishing the partner's authority, detailing who can make binding decisions, and how to protect or transfer each partner's interest in the business.
Your agreement must clearly identify the type of business entity and partnership you're forming. Different structures, like a general partnership or LLP, come with varying levels of responsibility and risk for the partners involved.
A comprehensive look at capital contributions is necessary. This goes beyond initial investments to address future infusions of capital and how these are recorded in each partner's capital account. The mechanism for the distribution of profits and losses should be transparent, ensuring everyone knows how the gains and hardships will be shared.
Keep in mind that with success, the business will evolve. Your agreement should, therefore, include a process for making amendments, allowing the partnership to adapt to changes in the partnership or business climate without friction.
Get Professional Legal Help With Your Partnership Agreement
The partners involved in a partnership will need to decide on the goals and structure of their business. However, the right attorney can help guide the process and help you avoid any misunderstandings or legal mistakes. Lawyers can help navigate state laws on partnerships and protect your startup from the beginning. They can provide extremely valuable legal advice.
Contact a small business attorney today and learn how they can help you make the right choices for your business.
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