Your partnership agreement is one of the most important business documents you will ever sign. There are many instances where people have gone into business with friends or loved ones without a particular contract, only to find that a partnership agreement should have been in order. A partnership agreement outlines the expectations of everyone involved and can help prevent certain problems in the future. Here are 5 elements to remember when drafting your partnership agreement.
- Percentage of Ownership
Every partnership agreement should highlight the percentage of ownership of each partner, depending on how much they are contributing to the business. Typically, there should be a record of each one’s contributions to be used in determining ownership percentage. Keep in mind that there are various factors that can influence the percentage of ownership. For instance, one partner may invest a lot of money in the business without putting too much input, while another partner may put in a lot of work to make the partnership a success with little to no monetary investment.
In most cases, profits and losses are distributed according to each partner’s ownership interest, unless otherwise stated. Your partnership agreement should also indicate whether partners will be able to take draws from the business. Draws are basically cash allocations made on a regular basis (like a paycheck), often considered an advance payment of profits from the company to the equity holders. Making these decisions in advance can go a long way towards preventing problems in the future.
- Binding the Partnership
Every partner has the capacity to bind the partnership without the other partners’ consent. However, there are certain financial decisions that need to be checked, otherwise, they may bring the business to its knees. Say, for instance, one of your partners decided to sign a contract for the conversion of one of your business floors into a Lego room. As cool as it may sound, that kind of liability could seriously jeopardize the financial stability of your company. As such, it is important to specify what type of consent partners should obtain before they can legally bind your business.
- Decision Making
Making decisions in a partnership can be difficult, especially when most of the partners do not have similar views. When a stalemate occurs, it can actually lead to business failure. To prevent this and to ensure everything goes smoothly, be sure to establish an effective decision-making process before you get into business.
- Exit of a Partner
Your partnership agreement should provide an outline of what should be done in case one partner dies or decides to leave the partnership. This basically entails drafting a buy/sell agreement, through which the partnership interest can be valued and then purchased by individual partners or the partnership as a whole.
The saying that money is the root of all evil couldn’t be truer when it comes to the business world. If you are planning to get into a partnership, Tanika L. Finney can help you draw a proper partnership agreement that will ensure a seamless business relationship moving forward. Give us a call at 334-246-4170.