A business partnership agreement is a vital component to the formation and ongoing operation of a company. How you and your partner agree to make money and control decisions should be address before you’re overwhelmed with the day-to-day operations.
As you start to create a partnership agreement, consider adding these eight details to help prevent future issues.
1. Who will fund the business’s formation
Each partner should have a clear understanding of their stake in the business’s creation and any ongoing financial needs. Businesses require a lot of capital, and not just monetary: The investment in a business includes time, effort, supplies and more are just as crucial. Consider implementing “sweat equity” earn out provisions over time which reward a partner with a greater profit share in exchange for work invested.
2. How each partner will make money
Any agreement should offer details for how the partners will earn profits. That includes profit distribution, timing and the terms of each partner’s salary.
3. Exactly what each partner owns
This is especially advantageous if the ownership agreement needs to change in the future, either because someone is looking to exit the business or a tragedy occurs. Address buyout options and what each partner would gain in the event of a sale.
4. Who is responsible for making decisions
It may seem like a simple component, but decision-making is often the source of many partner disputes. Will decisions require a unanimous vote or does one partner have the final say? Will there be a different process for making decisions based on what type of decision is being made?
5. How to resolve disputes
Speaking of partner disputes, how to resolve those disputes is a key aspect of any agreement. You may feel perfectly in sync right now, but a disagreement is bound to happen. In fact, it’s probably healthy for your partnership. To make sure everyone is fighting fairly, outline how to settle your differences with minimal damage to the relationship and the business.
6. How to manage major changes
An agreement would benefit from clauses that address possible scenarios that could affect the businesses, such as a partner’s ill health or death, retirement provisions, a buyout and other circumstances that would allow a partner to modify the agreement.
7. How to dissolve the partnership
It is possible that, someday, the partnership will need to end if you can’t agree on the business’s future. Be sure to understand the Texas Business Organizations Code for the default mechanisms and then decide if you want to adopt those provisions or modify them.
8. The legality of the agreement
A partnership agreement should be legally binding and include any necessary legal details. Attorneys can review agreements before signing or help form them at their inception, which can offset additional time, money and headache during a dispute or a business dissolution.
With these eight elements, a business partnership agreement can have the strength to lead your company into its future securely and with mutual benefit.