Crafting a business alongside a partner has the potential to be one of the most exhilarating experiences in life. Be it a high school friend, a workmate, or an individual whose attributes blend seamlessly with yours, forming a partnership naturally seems like the next step whilst contemplating along the lines of ‘what needs to be done’ and ‘how to do it’. Before you get down to shaking hands and getting on the road with your entrepreneurial beast though, there is one step you need to keep in mind, and that is: understanding the partnership agreement alongside drafting it.
Despite being treated dismissively from the offset, written partnerships are the legal structures of any business in relation with one another, hence the name backbone. Like everything else, it also has its pros and cons, listed expectations, responsibilities, and a manner of how to deal if matters take unexpected turns, some useful dispute resolving frameworks if you will. As it turns out, the majority of business partnerships do not fail because of the absence of market demand, effort, or business activity, but rather fall short due to the presence of lack of clarity, context, and communication around roles, finances, and authority. This is where a well-crafted agreement comes in.
However, the partnership agreements come with their own challenges. Ownership stakes and profit-sharing models can get sensitive, alongside management responsibilities and exit strategies. This needs to be looked at from multiple perspectives and layers of foresight; quite a lot can be mismanaged.
In this blog post, we'll summarize the main topics such agreements should address. As well as what needs to be a covered form both a legal and practical view. You can better prepare to shield your affairs from legal troubles, either on a business or individual level. With this guide, you can properly start or adjust arrangements with ventures at hand - all while ensuring proper legal coverage.
How to write a Partnership Agreement / Partnership Agreement Checklist
1. Learn About a Partnership Agreement
A partnership agreement contains the tools necessary that every business needs in order to enforce itself as a working partnership. It details every partner’s role and functions, along with the balance they’re expected to be held in, their stake in profitability and loss, potential conflict resolution, and other exit-altering actions.
Not having a written agreement is risky even if you trust your partner completely. Oral agreements tend to be inclined to misunderstandings, but they can also lead to high expensive disputes in the future.
2. Clarify Roles and Responsibilities
Who in the business does what? Be very specific. Without overlap, clearly identifying each partner's duties helps to avoid arguments, shifting blame, and resentment.
- Who is in charge of marketing?
- Who does the finances?
- Who has hiring/firing power?
Even if you believe it is obvious, write it down. No one wants conflict, and ambiguity is the enemy of peaceful partnerships.
3. Define Capital Contributions
What is each partner providing in terms of cash, assets, or resources collectively? What if someone provided equipment? What if someone provided intellectual property? What happens if funding is required later down the line?
There should be set expectations clearly stating:
- Amount to be initially invested,
- Amount to be put forth later by other partners,
- Percent allocated towards ownership,
- Loading terms, and
- Ongoing funding and owning terms.
By establishing these agreements, everything will be kept precise and upfront from the start.
4. Decide How Profits (and Losses) Are Shared
Not every partnership divides profits equally at fifty percent. The division defined should align with the respective partner’s contributions, responsibilities, and obligations. Include clear detail on how to execute the following:
- When and through what method will profits be distributed?
- What percentage will each partner receive?
- Will any profit be reallocated into the business?
Also, we shouldn’t neglect losses— that section is equally important.
5. Plan for Decision Making and Disputes
Decision making is among the most frequent sources of disputes. Your agreement should stipulate:
- What kinds of decisions require unanimous agreement?
- What decisions may be made by a simple majority?
- How will disagreements be adjudicated?
- Mediation or arbitration as methods of resolving disputes.
- Legal action in the absence of informal solutions.
Disputes that can be resolved without court intervention are often addressed in mediation or arbitration clauses.
6. Expand with Exit Strategies
If a partner intends to exit the business— or worse, dies or becomes unfit to run the business— what happens then?
An exit strategy should outline:
- Provisions for the buyout (who is buying out whom and at what price)
- What takes place when a partner intends to sell his or her shares?
- Succession planning
- Guidelines for dissolving the partnership
It may be strange to discuss an “end” when you are just beginning, but to ensure long-term peace of mind, it is essential.
7. Put Down the Pen, and Don’t DIY the Legal Work
Looking for an online template to copy? Steer clear. Every business is different and so is every partnership agreement your business needs. It should capture your objectives and specific circumstances.
A business lawyer needs to be consulted so that they can draft or review an agreement. This saves you a lot of stress in the long run.
8. When to Draft the Agreement
A partnership agreement is best made before the business operations start. Disputes and money shouldn't be the determining factor. Easy and rational choices can only be made when everything is hypothetical.
9. Keep Compliance in Mind
An agreement must always comply with the governing local laws of the partnership. This is mandatory:
- Verify the laws concerning your location and constituents, including tax and liability.
- Obtain legal assistance in drafting an agreement considering criteria that does not include suggestive loopholes.
10. Plan for Regular Reviews and Updates
Changes in the external and internal business environment necessitate the need for changes in the partnership agreement:
- Add provisions for revision in line with changing dynamics.
- Changes in the goals, strategies of the business, and market, should also allow for amendments.
11. Address Partnership Duration and Renewal
In the agreement state whether the partnership:
- is of no duration or is for a specified limited duration
- requires to be renewed after the period ends.
This reduces ambiguity and some of the long term commitment concern.
Concluding Remarks
While one might claim that a simple handshake and cordial relations are enough to begin a business, it is a written partnership agreement that maintains its seamless operation. This piece of documentation is akin to your business’s foundation that holds everything firm while your partnership endures difficult hurdles.
Be meticulous at the outset. You will be grateful for it later.
