Starting a business can be quite challenging, and in the vast majority of cases, an individual won’t have every crucial talent, experience, or resource they need. This is why business partnerships are an excellent option to consider. However, as much as a partnership can help you, it is still necessary to plan for ways to avoid potential problems. A well-written partnership agreement can help to ensure that everyone is on the same page and conflicts are resolved quickly (and outside of court) whenever possible. When having a partnership agreement written up, make sure it includes the following items:
One of the most important items in a partnership agreement is going to be identifying who owns what percentage of the business. This can be based on any factors you and your partners agree to, but it must be clearly written out in the agreement. Remember, a simple verbal agreement of 50/50, for example, is easily disputed in courts. Writing it into the agreement is the safest way, and can help all parties avoid many problems down the road.
Profits & Losses
When the business experiences either profits or losses, the partners will either receive those profits or have to pay for the losses. Identifying where the profits should go, and who is responsible for any losses, is critical since money disputes are among the most difficult to resolve in a business. Remember, the agreements for profits and losses don’t have to be the same. In some cases, profits are split 50/50, but losses are paid for by just one member who is putting up the funds.
Having instructions on how disputes should be resolved may seem unnecessary at first, but can really help to avoid more problems down the road. The agreement can state that one partner has the ability to make final decisions during disputes, for example. It can also be a good idea to agree to use a specific moderator when conflicts arise.
Planning for how partners can properly exit the business at some point can help avoid problems for the partners themselves, and the business as a whole. Having options to leave will allow the business to continue, be sold, or dissolved, depending on what you and your partners agreed on.
Division of Labor & Decision Making
Including information on what tasks each partner will be responsible for is very important. Related to this is identifying who will make decisions. In many cases, the partner responsible for specific tasks will, for example, make the final decisions related to those particular tasks. However the division of labor takes place, it should be clearly written into a partnership agreement.
Avoid Mistakes in Your Partnership Agreement
Whether you are just starting your business, you want to formalize an existing business, or even if you need to make changes to an existing partnership agreement, we can help. Please contact us to schedule a consultation and start working on your partnership agreement right away.