Businesses set up as partnerships, legal entities where two or more people own and run a business, enable companies to benefit from multiple owners’ varied knowledge, skills, and resources. A partnership is alike as sole proprietorship, and each partner owns a part of the business’s assets and liabilities.
With more than one person making decisions and disturbing outcomes, different aspects of starting and running the business need to be addressed up front. The clearer and more complete the agreement, the less that is up for debate or disagreement when partners don’t quite see eye to eye. So, what should your partnership agreement include? Here’s a list of some key items you should definitely think about addressing in yours:
1. Percentage of ownership
You should have a record of how much each partner is contributing to the partnership prior to its opening. Typically, these contributions are used as the basis for the ownership percentage, but this is not a cut and dry formula.
2. 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.
A draw is generally a cash distribution on a regular reoccurring basis similar to a paycheck, without any taxes withheld. It’s considered an advance payment of profits from the partnership business to the partners. Because money is the origin of all evil as they say, you and your partners need to make these decisions in advance.
3. 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 time share. 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 they can obligate your company.
4. Decision Making
Making decisions in a business is often like trying to make decisions in a committee, nothing gets done. In fact, it can often standoff a company, which results in business failure. Therefore, you need to set up a decision-making process in advance so your business operations can move along smoothly.
5. Dispute Resolution
Your partnership agreement should define the resolution process. Should mediation be the initial step? Will you require arbitration to settle differences? Keep in mind that if a dispute goes to court, lawsuits become part of public record. Setting up how you’ll handle disputes will take the guesswork out of navigating dissention.
6. Critical Developments
What happens if one partner dies or wants to leave the partnership? To manage these situations you need a buy/sell agreement. This establishes a technique by which the partnership interest can be valued and the interest purchased either by the partnership or individual partners.
7. Dissolution
Your agreement should also include what steps should be taken to legally end your partnership. You might opt to do this if you and your partners can’t agree on the future of your business. Also research what your state requires to dissolve partnerships.
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