Partnership Agreement? Before Giving Up a Share of Your Business to a Partner, Read This!

Partnership Agreement? Before Giving Up a Share of Your Business to a Partner, Read This!

You may not need to have a partnership agreement to enter into a business partnership. But like many relationships, people do not always see eye-to-eye over time and disputes can arise.  Without a formal partnership agreement, problems can quickly escalate into major crises. And think of this. If you can’t talk about it now, while your relationship is friendly, you certainly will not be able to negotiate rationally under the pressure of anxiety and disagreement.

Here are some of the main questions that should be addressed in an agreement:

  1. What will each partner contribute financially?  It’s important that this amount be recorded so that there is no dispute when the exit strategy is implemented.
  2. How will the work be distributed among the partners?  If this isn’t sorted out from the start, partners will very quickly get in one another’s way and there will be confusion about decision-making jurisdiction.
  3. How will income be determined?  Profits are great, but partners need to know how they will be paid personally for their work and how much will go back into the business.
  4. How is property determined in the partnership and what is included?  This can include more than the tangible items, such as real estate and computer hardware.  It can include goodwill, client lists, and intellectual property.
  5. How can the property be used by the partners?  Sometimes, it’s intuitive how property will be used.  For example, computers brought into the business will likely be used by the partners.  But what about intellectual property?  Would all partners be allowed to make changes to it?
  6. How will banking, taxes, and accounting be handled?  Will the accounting be done externally, or will one of the partners do it?  Will there be company credit cards?  Who will have signing authority?
  7. How will the partners resolve disputes?  It’s important that this be included in the partnership agreement.  Simply talking it out may not resolve an issue, so the most common method is to use a mediator.
  8. What happens if one of the partners passes away or wants to leave the company?  It’s important that it be decided beforehand how the departing partner will be bought out.
  9. What is the exit strategy?  Disputes are common when a business is sold because partners often disagree on how the proceeds should be split.  Some believe that they have worked much harder on the business than the others and deserve more.  So the exit strategy needs to be decided beforehand.

Start with a simple brainstorming session and hammer out an informal letter of agreement first. Then seek legal advice before committing. Why bother with lawyers? They understand the law and how contracts will be interpreted if challenged by either party in the future. It’s an important form of insurance for you and your partner.

To your business health!

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