So you want to go into business with someone. Good for you. Maybe your potential partner is a family member, long-time friend, investor, or business associate. Whatever the relationship, the start of a partnership is much like the beginning of a romantic relationship. The parties are euphoric and it may seem as though nothing could go amiss. But before you walk down the aisle and say “I do” there are critical things upon which you must agree.
Just as every personal relationship has its ups and downs, so do business partnerships. So before you tie the knot so to speak, you need to enter into what is known as a partnership agreement to protect yourself and your business. Below are some of the common elements which you should include in a partnership agreement, which by the way, must be in writing and signed by all partners. This is not meant to be an all-inclusive list, so consult with your professional advisor.
- Percentage of Ownership. You should have a record of how much each partner is contributing to the partnership prior to its opening. (People have short memories.) Typically, these contributions are used as the basis for the ownership percentage, but it doesn’t necessarily have to be. For example, one partner may put in a considerable amount of cash, with no plans to work in the business, and a second partner may not invest cash but will provide the sweat equity to make the business a success. As such, the partner who works the business full-time may get a larger percentage or vice versa. That’s up to you.
- Allocation of Profits and Losses. You must decide if the profits and losses will be allocated in proportion to a partner’s ownership interest — which is the way it is handled unless otherwise indicated. Also, will partners be permitted to take draws? (A draw is an allocation of profits from the business prior to the actual distribution among all partners.) Because money is the root of all evil, as they say, you and your partner(s) need to make these decisions in advance. Financial disagreements often cause partnerships to fail quickly.
- Who Can Bind the Partnership? Generally speaking, any partner can bind the partnership without consent from the others partners. Imagine if your partner, without your knowledge, signed a contract for a private jet timeshare. (Sounds cool, but not practical.) That’s certainly something most small businesses can’t afford and such a liability could be a significant risk to the financial stability of your business. So you must clarify what type of consent a partner must obtain before he/she can obligate your company.
- Making Decisions. Making decisions in a business managed by partners is like trying to make decisions in a committee, nothing gets done. In fact, it can often stalemate a company which results in business failure. Therefore, you need to establish a decision-making process in advance so your business operations can move along smoothly. There needs to be a captain of your ship.
- The Death of a Partner. What happens if one partner is deceased or wants to leave the partnership? To manage these situations you need a buy/sell agreement. This establishes a method by which the partnership interest can be valued and the interest purchased either by the partnership or individual partners.
- Resolving Disputes. What happens if you and your partners reach a point where you can’t agree? Do you head to court? Well, only if you want to spend a lot of time and money. My recommendation is to include a mediation clause in your partnership agreement that will provide a procedure by which you can resolve major conflicts.
As I noted earlier, these are some of the key elements which a partnership agreement should include. You and your partner(s) should schedule a time to talk about these issues, but it is best to go to a legal professional who can draft the agreement for you. An attorney can help advise you about all the necessary elements of a partnership agreement so you can manage, protect and grow your business venture.