Creating a partnership agreement is one of the most important things you can do before investing time and money in a joint venture. While it is legally possible to create a business partnership without a partnership agreement, entering into business without an agreement can lead to personal and financial issues between partners down the road. Enlisting the help of experienced contracts lawyers will ensure that the partnership agreement covers all elements of the business relationship among the partners. While every partnership agreement will be different, there are certain issues which are typically covered, including:
The first item in a partnership agreement includes the individual amount each partner has invested, including the building or other real property, as well as specialized equipment for the business. It is essential to itemize these types of investments.
Roles and Responsibilities
Another important element of a partnership agreement is to determine what the roles and responsibilities of each partner will be. Oftentimes the partner who invests the most does not want to have an active role in managing the business. On the flip side, partners may decide to determine control of the partnership based on the amount invested, or split control equally. Determining the roles and responsibilities of each business partner is vital, as the success and growth of a business often relies on the competency of its management.
Profit Sharing and Financial Management
Profit sharing and financial management are also key elements that should be outlined in any partnership agreement. Partners may opt to invest a certain percentage of profits back into the business, and partnership agreement will also determine whether managing partners will receive a salary and how much it will be. Seasoned business attorneys can help guide you through the process of what kind of compensation is fair considering your amount of investment.
A few key questions to take into consideration when it comes to financial management of day-to-day operations are:
- Which bank(s) will you use for your business account?
- Will your business have a line of credit?
- How will the company finance large purchases?
- Which partners will have signing power for the business’s finances?
The partnership agreement should also include a method for managing disagreements. While partnerships are often started by friends or colleagues, disagreements happen, and it can be helpful to determine how the partners will work out these disagreements ahead of time. A neutral mediator can be a constructive way to resolve issues.
Death, Disability and Dissolution
It is best to be prepared with a business succession plan that is briefly outlined in your partnership agreement. It’s important to determine who you trust to make decisions on your behalf, who will inherit your shares of the company, and whether you want your beneficiaries to have a say in what happens to the business. Conversely, you should outline whether you would be willing to share power with your partner’s spouse or family member.
It is also imperative to discuss what will happen if one of the partners decides to leave the business. Creating an exit strategy and putting it into the partnership agreement can save a lot of headaches down the road. The partnership agreement can provide details on the buyout process, including each partner’s investment and what rights departing partners will have if they want to start a similar business.
A comprehensive and thoughtful partnership agreement can lead a business down the path to success and help it flourish Our experienced lawyers in Montgomery and Delaware counties can help you to map out all aspects of your partnership and get your business off to a running start.