7 Things Every Business Partnership Agreement Needs to Address

7 Things Every Partnership Agreement Needs to Address
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So you have a business idea. Then you realize that with someone by your side – a partner- your business can be even bigger than you expect. So you get your partner ready — be it your family member, relative or even a close friend — and the excitement grows greatly.

You both feel you've got things under control and you're ready to take on the world.

Just then, reality hits. You realize that it's all not roses and cinnamon, and just because you have a partner doesn't make you immune from the trials and disputes of the business world.

According to Ocean County Criminal Lawyers, “lack of concrete laid down rules to follow often results in partners duping themselves, and this sometimes results and grows into a deep rooted criminal case in court.”

A business partnership has a higher chance of kicking off compared to a sole proprietorship if it’s done right.

In a partnership, your business gets to benefit from the wealth of experiences, resources and ideas you and your partner bring into the business. But just as there are things to gain, there are also things to lose.

Clashes between partners can arise for different reasons; ego, money, personal bias.

This is why there needs to be rules in place to handle certain issues when they arise.

Here, a partnership agreement is necessary. A partnership agreement is the rule book you and your partners run your business on and it’s legally binding on everybody involved in the business.

Any such document like a partnership agreement needs to address the following elements, in writing, and should be signed by all partners involved in the business.

1. Percentage of ownership.

This part of the agreement is very important and should be one of the first things discussed by all partners in the business. The percentage each partner owns is something that needs to be addressed at the onset of the business.

Knowing how much of the business each partner owns will help prevent any legal battles in the future when new claims try to surface. Discuss with your partners to agree on just how much each of you will own.

2. Profit and Loss allocation.

There should be proper clarification on how profits and losses will be shared amongst the partners.

This allocation can be done by using the percentage owned by each partner to decide how much profit/loss is given.

In the end, it is at the discretion of you and the partners involved. Also to be considered is if you and your partners will be able to take draws; which are similar to paychecks and how often can be taken on a regular basis.

3. Contributions to be made.

Now that you've outlined percentage of ownership and profit and loss allocation, you need to outline just much each partner will contribute to the progress of the business. This might be a little arbitrary so proper discussion at this point with your partners is necessary.

For instance, one partner might be willing to give a lot of financial backing, but might decide to do little to no work. Another partner might not have the resources but could be willing to put in a ton of work.

4. Partnership binding.

You're making progress with the agreement. Kudos to you. Now, you need to understand something; your business, as an entity of its own, will have the ability to make certain purchases and deals in its name.

However, in as much as it is an entity on its own, it is still controlled by the owner. In a sole proprietorship, this is no problem. But in a partnership, this is a matter that requires scrutiny.

What type of consent does a partner require from the other partners before a binding agreement/contract can be signed? This needs proper clarification to prevent future problems.

5. Dispute resolution.

Any kind of relationship — platonic, romantic even business — will have its share of disputes. And when disputes occur, it's always a good idea to find a way to come to a resolution.

So for your partnership, what happens when you and your partners have a disagreement? Would mediation be the first step to take? Or will it become a court case? Putting in place the steps for dispute resolution amongst partners will prevent the use of guesswork when the time comes for an actual dispute resolution.

6. Ownership details.

Sometimes a partner might decide to no longer be a part of the business. Or a partner might pass away. In events like these, it's a good plan to have the necessary steps available to take. And what about new partners? How will the business handle them?

The partnership agreement should have clear terms on these several issues. If a partner leaves and sells his share of the business, what amount goes to what person?

If a partner dies, how is the share divided? What of the family of the deceased? These scenarios need to have cut and clear steps to be taken.

7. Partnership (and business) dissolution.

In the event that you and your partners decide that the partnership has reached its end, the partnership agreement should properly outline what needs to be done when such a decision has been reached.

This could happen when there's no solid agreement between you and your partners on what the future of the business should be. It is worth noting that different states could have their own laws relating to the dissolution of partnerships, so you should know what is required in your state to dissolve your partnership.

There are several samples on partnership agreements that can be found online in the instance that you require a sample to work with. You should have legal aid with you, however, whenever you're drawing up your partnership agreement so it can be as complete as possible.

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