The Top 10 Issues Every Partnership Agreement Should Cover
Excerpted from The Ladies Who Launch
Reprinted with Permission
Memorializing a partnership agreement in writing is the best way to cement a business relationship. You and your business partner could be the best of friends and read one another’s every thought, but unless you have an agreement in writing that covers at least some of the issues below, you may find your friendship and business on shaky ground.
1. Contributions. Money, money, money, and where is it coming from? How much will each of you contribute to the business in the beginning? Will one of you put up the cash while the other works in the business? Will you be equal partners, or 60/40, or 70/30?
2. Management. Who will keep the books, deal with customers, supervise employees, negotiate with suppliers?
3. Decision-making. How will you make decisions? Will it take a unanimous vote of all partners for major decisions? Will one partner make day-to-day minor decisions? What if you can’t agree?
4. Authority of each partner. Can either partner bind the other to a contract with a vendor or investor?
5. Division of profits. Will profits and losses be allocated equally? Will you each get paid weekly, monthly, or annually?
6. Admission of new partners. Will you admit additional partners? Will the new partners have to contribute an amount of money equal to what the original partners put into the business?
7. What if a partner wants to leave the business, or dies? All good partnership agreements have a provision for a buyout. A buyout occurs if one partner dies or wants to sell their portion of the business. Buyout provisions state how the business’ value will be determined and how the departing partner or her estate will be paid.
8. Role of a spouse? In many community property states, a spouse is entitled to half of his or her spouse’s interest in a business. Many partnership agreements provide for a spouse to agree to the terms of a partnership agreement.
9. Issues specific to your business or industry. Will you and your partner be allowed to start competing or complementary businesses with other partners? Will one partner be CEO and the other be CFO for the life of the business or will you trade off?
10. Disputes. If a partnership is dissolving and no decisions can be reached by the partners, a provision allowing for arbitration or mediation is essential to a smooth and less costly resolution.
As business partners you should understand how the other partner feels about each of the subjects above. Then take pen to paper and put it in writing. Don’t forget to visit an attorney to make it legal, and you should have the beginnings of a fruitful, long-lasting, and hopefully more stable business relationship.
Written by Jennifer Keller Smith, a member of the Los Angeles Incubator and a partner with the Keller Law Firm in Manhattan Beach, California.
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