6 Key Components of a Business Partnership Agreement
6 Components Parts of a Business Partnership Agreement
When you enter into a business partnership, you probably aren’t thinking about all the ways that things could go wrong. At this stage, most entrepreneurs are more focused on launching their operations than the day-to-day mechanics that come with owning a partnership. Still, you should absolutely draw up a Business Partnership Agreement between yourself and your partners. It’s an important document for any partnership. No matter your industry or goals, there are a few key provisions that everyone will want to include in a business partnership agreement.
1. Who Owns How Much?
One of the first things that any Partnership Agreement should address is the percentage of ownership that each partner has in the company. Most typically, this is based on each partner’s contribution to the company, which should be similarly recorded. A partner can contribute more than just financially – they can contribute equipment, intellectual property, and other things of value as well. This can even include “sweat equity,” which refers to the work, labor, and effort that a partner invests to get the company up and running.
2. How Will Profits and Losses Be Split?
Next, you’ll need to decide on how the profits and losses will be divided. By default, this is based on the partner’s percentage of ownership in the business. If you want a different arrangement, say an equal split regardless of ownership interest, then you will need to include that provision in your Partnership Agreement. You’ll also want your Agreement to note if the partners will be allowed to take “draws.” Similar to a paycheck, a draw is an advance payment of the profits madeto the partner on a regular basis with no withholding requirements.
3. Does Your Business Partnership Agreement State Which Partners Have Binding Authority?
“Binding authority” is the ability of a partner to make contractual commitments on behalf of the company without first consulting the other partners. Unless stated otherwise in your Partnership Agreement, all partners will have binding authority. This can leave you financially and legally liable should one of your partners make a bad call. If your partners don’t always demonstrate the best judgement, then it might be smart to limit this authority.
4. What is the Decision-Making Process Like?
Next to money, feeling left out or ignored during the decision-making process is one of the fastest ways for resentment to grow within a partnership. After all, even the best teams will clash and disagree from time to time. Good Business Partnership Agreements lay out procedures that help to avoid gridlock and full-on arguments. They accomplish this by standardizing the decision-making process and creating contingencies for when the partners are unable to come to an agreement. This is critical to running a successful partnership.
5. A Partner is Leaving — Now What?
It’s easy to imagine your partnership lasting forever when you first start out. But things are bound to change as your business grows. Even the closest partners can grow estranged and bitter over the course of their relationship. Sometimes a partner grows tired with their status quo and wants to break out in a new direction. No matter how good things might seem at the beginning, your Business Partnership Agreement should have a procedure for dissociating from the company. Typically, this is done with a Buy/Sell Agreement. It might be unpleasant, but you should also consider what to do in case of the death of a partner.
More information on exiting a partnership can be found here.
6. Does Your Business Partnership Agreement Include Provisions for Irreconcilable Differences?
A Business Partnership Agreement exists to guide you, your partners, and your business through the worst of times, and few times are worse than when the relationship between two or more partners disintegrates beyond repair. These are conflicts that are much more serious than a typical argument. Sometimes this can even lead to litigation. Requiring partners to enter mediation before taking things to court can save everyone a lot of time, money, and energy.
Looking to start a business or grow your current business? Contact FL Patel Law today by visiting our website or calling 727-279-5037.