You may not have the skills, financial resources or desire to operate a business venture by yourself. Collaborating with one or more partners may help you achieve success. Still, you do not want to leave the health of your operation to chance. Having a well-written partnership agreement may help you set expectations.
There is no such thing as a standard partnership agreement. Business owners must tailor these contracts to meet their specific needs. Nonetheless, effective partnership agreements usually address some common topics:
- Contribution and ownership
Each partner typically contributes something to the business enterprise. Also, all individuals are likely to own some percentage of the partnership. Still, contributions and ownership may not be the same for everyone involved. You should, therefore, indicate in your agreement the percentage of the venture that each partner owns. Ownership typically corresponds to the value of each partner’s contribution.
- Profits and losses
Your partnership may make or lose money. In your partnership agreement, you must allocate profits and losses to each partner. You should also indicate when partners may withdraw cash from the venture.
Most partnerships do not last forever. Accordingly, your partnership agreement should indicate the length of the partnership. If you intend to operate the venture indefinitely, you should decide what factors could trigger its end.
One partner may want out of the partnership, while the other partners prefer to keep the venture going. If you do not want to wrap up the partnership, your agreement should address withdrawal. You should probably also include a clause that deals with a partner’s death.
- Authority and dispute resolution
Chances are good that every partner will not have the same decision-making authority. Still, you can minimize conflict by implementing a decision-making process. For example, you may want to give majority partners two votes and minority partners one. If a dispute arises, your partnership agreement should define how to resolve it. This may include mediation, litigation or a buyout.
With a bit of effort, you can build a solid foundation for your partnership. Fortunately, you and your partners enjoy wide latitude in drafting a partnership agreement that meets the needs of your business venture. While you may execute essentially any agreement, you should be sure to address the above topics.