A business partnership agreement is similar to a prenuptial agreement in a marriage. Just like prenups are signed before the wedding vows, a partnership agreement should be executed before a business is up and running.
Often, friends start a company together and get along great in the beginning when things are exciting and going well. But these relationships can quickly sour when difficulties arise, such as partners disagreeing over how the business should be managed.
What does the agreement need to include?
Before investing one dollar in a company, partners should agree on the terms of the relationship, including:
- Each partner’s contribution: Detail current and future expectations for partners, including the time and capital each will contribute to the company.
- Financial decision-making: Will all decisions over money be made together, or will one partner have the ability to make financial decisions on their own, or for only certain areas of the business?
- Exit strategy: Provisions must be made for the business’s survival should one partner die, become incapacitated or decide to leave.
- Dissolution: A plan must be in place to determine what happens if the business goes bankrupt.
- Business disputes: If both partners own equal portions of the company, drafting a legally binding resolution strategy is essential when they are deadlocked over a business decision.
- Compensation and profits: The agreement should spell out how profits will be distributed between partners, and what percentage will be reinvested in the business.
Protect your company’s future
Regardless of the type of business you and your partner create, disagreements typically arise from many different situations. Some partners avoid drafting an agreement as a way to save on legal costs while their company is taking its first steps.
However, guidance from an experienced commercial law attorney in drafting a partnership agreement can be crucial for a company’s future success and give both partners peace of mind that they have a system in place to settle disputes.