A partnership agreement is a written agreement between two parties that details the working relationship of the two people involved. This is an important agreement for business partners in order to avoid conflicts and unwanted legal proceedings down the road. This legal agreement should include details such as the nature of the business, the responsibilities of both partners, and the rights of both people.
The agreement should be completed before the two parties begin seriously working together on a business. This will ensure that they are aware of their responsibilities and also so that a contingency plan will be in place.
If you want to set up a partnership agreement for a small business idea, get all the information you can about your idea beforehand. Remember that the partnership agreement will need to be signed by both parties. To ensure you have an official partnership agreement, consider asking for legal counsel and a witness to sign the agreement as well.
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Let’s say you’re about to start a business with someone you know and trust. Perhaps a close personal friend, or an associate you’ve worked with many times in the past. In any case, the outlook looks good. You have a common goal set, and one or two ideas of how it might work. Seems like it’s all green lights from here.
Stop. Fast-forward five years down the road. Everything is in turmoil. Your business is failing because of a fatal error, and you’ve nothing to do but blame one another. Worse, you have no contingency plan.
This nightmare scenario is the while reason partnership agreements exist. A partnership agreement is, essentially, a legal document laying out the tenets of a business partnership. These rules apply to all important partnership divisions, including the division of assets, the division of labor and the division of profits.
There should also be rote procedures laid out for what to do if a partner dies, joins or wants out. Most of the time a partner will need to buy out his or her share, and you will need to state exactly how the value and prices of your business will be determined.
Moreover, you’ll want to figure out liability. A General Partnership, which is the default partnership format in the eyes of the law, ascribes equal liability to all members. However, in the case of a Limited Partnership or, as is more popular these days, a Limited Liability Partnership, some members escape a certain amount of liability or avoid it altogether. If you or any of your partners wants to gear liability arrangements in your favor, you’ll want to write this out in the partnership agreement.
In short, you’ll want to outline everything that is important to you in your partnership agreement, whether it’s your method for dividing your hard-won loot or the brand of crackers served at meetings. Drawing up a partnership agreement is a relatively simple process. The steps are as follows –
1.) Sit down with your partner or partners and figure out how you want your partnership to work.
2.) Write down all the details.
3.) Go on the web, find a free partnership agreement template and plug in your information. Trust me, this is a whole lot easier than writing one from scratch as the prompts of a template make it less easy to forget things.
4.) Treat yourself and your partners to martinis. You are in business!
Legal Considerations of a Partnership Agreement
If you’re going into business with someone, you don’t want to go in flying, as it were, by the seat of your Ralph Lauren swim-trunks. You want to go in with any idea of how, and indeed that , it is all going to work. For this reason, it’s a good idea to put your partnership agreement down in writing. There are a few legal issues to keep in mind when doing this.
Who’s really pulling the strings?
There are two main bodies that dictate the workings of a business partnership agreement. To wit – the laws of the state in which the agreement is made and the rules laid out in the official document. Surprisingly, you don’t need to base your agreement’s tenets entirely upon the governing state’s laws. The rules laid down by partners generally supersede those rules enforced by the state. This means you have relatively free rein when it comes to many key elements, such as divisions of profits, assets and responsibilities. However, any issues not concretely outlined in the agreement are automatically seen as reflecting the laws of the state.
Why should you put your partnership agreement in writing?
The short answer here is “see above.” If you don’t put your agreement in writing, the state gets to control it in its entirety. If things go awry, both parties have no control over the outcome. What’s more, it makes it more likely that things will go awry, as you have not drawn up the rules of partnership yourselves. In business arrangements, and in fact many areas of business, it is always best to err on the side of micromanagement .
What should put in writing?
There are three basic types of business partnership. The first is called a “General Partnership.” It runs on a majority vote and holds all members proportionally or equally viable. If you want to follow a different model that protects some partners from liability, like a Limited Partnership or an Limited Liability Partnership, you’ll want to take the time to draw up an agreement.
A partnership agreement should cover the following bases –
Will decisions be made by a majority vote? Will each partner be able to vote equally or will level of investment govern level of control. It may seem fair to divide power equally, but then having an even number of partners presents the risk of attrition. Keep this in mind when drawing up your agreement.
Division of interest among owners – Often this is equal, but it does not have to be.
Withdrawal procedures – How will the price of one owner’s shares be figured if he or she withdraws? How will payments work for his or her share? This is a particularly important decision to make, as the financial backlash of withdrawal can get quite ugly in court.
In sum, it’s worth getting your agreement down in writing, either by digging up a free partnership agreement template on the internet or writing it from scratch.
The Main Components of a Partnership Agreement
Name of the partnership – Identify the legal name of your partnership. This means your registered name. It could be anything you choose, provided it is fully registered and, of course, not already being used by somebody else.
Contributions – Lay down who is responsible for cash, property, and other important assets. Ownership-wise, is the partnership an even split? Laying out these details ut beforehand is the key to avoiding dispute and confusion down the line.
Distribution of profits, losses and draws – How do you plan to distribute the profits of this partnership? Remember that you might have different financial abilities than your partners. Be sure to set up a system wherein everyone can operate comfortably and contribute steadily.
Authority ascribed to partners – The default arrangement in a partnership agreement is that any partner can form a binding agreement for the whole partnership. If you don’t want this to be the case, you need to lay it out explicitly in your agreement.
Decision-making within the partnership – Groups function best with a voting structure. How do you want your partnership’s voting to work? There should be a provision in your agreement ascribing voting power to each member of the partnership. Will it be split evenly? Will it be divided according to other factors, such as investment percentage?
Duties ascribed to management – You can leave this section a little vague, but it’s worth at least putting the infrastructure in place. Who will be responsible for the following?
· Business negotiations
· Customer relations
· Employee management
· Bookkeeping duties
New and departing partners – With any luck, your business will flourish, and will at some point be in need of expansion. That means new partners. You may also experience the other side of things, in which a partner has to withdraw from the agreement. This can be due to anything from a practical choice to an untimely death. The wisest move is to lay out a standard procedure for adding partners, to ensure fairness and smooth sailing when the time comes.
Dispute resolutions – Court can be an ugly place, especially between a once tight team. It’s a good idea to arrange for dispute resolution in your partnership agreement. Set up a system whereby a mediator or other outside party is brought in to help settle disagreements outside of court.