Partnership Agreements aren’t the first thing that most entrepreneurs think about. They are excited to get their company launched. With their partners, they’ve got goals and ambitions. Some are lofty enough to shoot for world domination. Others are just looking to be the best on the block. Whatever your business is striving to be, as you move into more concrete discussions and set up of the partnership, you’ll need to make sure you have the right documents. Although you may have experience creating business plans, the legal documents are a completely different challenge. Your business is personal to you and your partners, and your partnership agreement should reflect that.
What is in Partnership Agreements?
You can find plenty of “form” agreements on the internet. I do not suggest using them, but they are out there. Your local small business administration may also have some forms available for you on the web. Your partnership agreement should contain:
- Governance – who makes the decisions in the company. Do you and your partners want to have all the major decisions agreed upon unanimously? If there are many partners, that may not be possible and you may need to govern by a majority rule. As partners, you’ll also need to decide the percentage of the company that each partner owns;
- Contributions – how much each partner is contributing to the business for their share of the partnership. This provision is particularly important if not everyone is contributing equally. One partner may be bringing patents or other intellectual property. Another partner may be doing most of the work, commonly called “sweat equity.” Maybe you have another partner who is bringing all the money and funding the company. With all these different types of contributions, your partnership agreements have to be clear;
- Compensation – how much is each partner getting as a salary? There may also be “distributions” to the partners as well. And if one of the partners is loaning money to the partnership, how will their loan be repaid? Since many partnerships are not a simple 50/50 split, your agreement needs to make sure everyone’s compensation is clear;
- Death and/or Disability of a Partner – what happens if a partner dies or is disabled and can’t continue in the business. This is more common than most people think. In the businesses that do not have a plan, it can become a major issue. Without a plan, the business can be left in a precarious position. So make sure you plan ahead for your business; and
- Dissolution – what happens if the company has to close down. Nobody likes to think about these provisions when you are first starting out. You are excited for your new business. It’s going to take over the world. But at some point, you need some kind of mechanism in case things don’t go as planned. Companies with dissolution provisions in their partnership agreements are better positioned for an orderly wind-down. Those without it can be stuck in years of costly lawsuits.
All of these areas are important for you and your partners to consider as you put together your partnership agreement. Hopefully reviewing this shortlist shows you the importance of working with an attorney to make sure you get them right.
