When starting any business venture, it can be tempting to rush through the beginning planning phases in the excitement of it all. Don’t let this happen. Take the time upfront to set your business up for success. Establishing a solid foundation for your business will help save you time, money, and frustration further down the road. For instance, putting a solid, comprehensive partnership agreement in place can save you and your business partners many headaches later on.
A partnership agreement will look different for every partnership because every business is different. However, the most successful partnership agreements will address things such as how the partners and the business will handle business growth, business loss, and changes in the partnership. Planning for both the good times and the bad times is what a partnership agreement is all about.
What to Include in Your Partnership Agreement
First and foremost, your partnership agreement should include the name of your partnership. While some opt to have the business name include the names of the partners, others go with a completely fictitious name. Regardless of what you go with, selecting the name of your partnership is one of the first big decisions to be made. It is also important to register your business name with the state. Not only will this verify that no other business has the same name, but it will also act as a bar to other businesses who may want to use the same name in the future.
The partnership agreement should also memorialize the contributions of each partner. A contribution to the partnership may come in the form of capital or other resources. It may also come in the form of time contributed to building up the business. Furthermore, the partnership agreement should include any anticipated contributions that may be needed in the near or more distant future in order to build up the business.
It is also essential for the partnership agreement to include provisions for how profits and losses will be distributed to the partners. The agreement should be clear as to when and how profits will be distributed. Should the partnership need to dissolve, the partnership agreement should also set forth how losses will be distributed among the partners.
In a partnership, every partner is invested in the business. Because each partner has invested in the business, whether it be time, money, or other resources, it is assumed that each partner will have some level of decision-making authority over business dealings. The partnership agreement should specify each partners’ authority regarding making decisions for the business and entering into agreements on behalf of the business.
The partnership agreement should also address what happens when a partner passes away or withdrawals from the partnership for some reason. Procedures for such an event should be outlined in the agreement. It will help make for a smoother transition should a partner ever leave the partnership. On the other side of this, the partnership agreement should also address when and how new partners may be brought into the business. Putting these parameters and procedures in place will help ensure that the business is best prepared for major changes that may pop up along the way.
Additionally, the partnership agreement should include the prescribed methods for dispute resolution. It is generally preferable that litigation of disputes among partners be avoided at all costs. The partnership agreement may require that disputing partners go through mediation and arbitration in order to resolve any potential disputes.
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