A partnership is a legal entity where two or more people run a business. These types of businesses are built on the diverse knowledge, skills and resources of their multiple owners. At the same time, conflicts of interest must also be avoided to ensure the smooth running of a business. The secret to the success of a partnership depends in large part on the crafting of a partnership agreement. There are seven questions that should be answered before creating this legal document.
What will each partner contribute?
Each partner’s stake in the formation and ongoing finances of the business must be clearly defined. The agreement must state how much each partner will contribute to start the business, as well as what each partner’s responsibilities will be for the business. Every type of contribution should be covered: time, effort, customers/clients, equipment, etc.
How will profits be distributed?
The agreement must detail how the profits will be split; how each partner gets paid; and, who gets paid first. If a partner is to receive a salary, it should be clearly stated.
How will changes in ownership be handled?
The ultimate change in ownership would be the sale of a business. If this occurs, which partner gets what? Another case of change in ownership would be taking on a new partner. Partners are bought out, they withdraw, die or retire. A description of how to handle any of these scenarios should be included in the agreement.
Who makes what decisions and how?
Do not count on you and your partners seeing eye to eye. Day-to-day management needs to be defined. An approach to long-term decision-making should be agreed upon. Some votes require a unanimous vote, while others can be made by a single partner. If a single partner is to have the last word, this should be specified in the agreement.
How will disputes be resolved?
Partners will not always see eye to eye, and there will be disputes. This needs to be addressed. There needs to be a resolution process. Mediation might be the way to go. Differences might need to be settled by arbitration.
Are there contingency plans for the unexpected?
One might scoff at the ability to plan for the unexpected. Never underestimate the power of a contract. Put it in writing. If a partner gets sick or passes away, what happens? Buyouts happen all the time. You need to know what to do in these scenarios. The partnership agreement itself may need to be amended.
What steps should be taken to dissolve the partnership?
Sometimes partners do not agree on the future of the business. There are many issues that arise in this context, which need to be set forth in the agreement. For example, paying creditors and the division of partnership ​assets.
If you have questions about partnership agreements or need advice regarding a partnership dispute, contact this office for an appointment.
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