Forming a business as a partnership is exciting. But even if you run the business with a best friend, close family member or trustworthy colleague, you never know when things can go sour. A partnership dispute can cause your business to falter, especially if you do not have a strong agreement in place. In our experience, typically a successful business produce more disputes than a struggling business. With a division of responsibilities, there will be natural differences in expense reimbursement, re-investment goals, and even procedural policies. These disagreements may seem small, but add up over time and can fracture even the strongest relationships.
Writing the general and specific elements of the partnership agreement can give you the tools necessary to avoid and resolve arguments. Here are the main advantages of putting this document in writing.
Clarify authority
Do you want both partners to have equal authority over major business decisions? Your partnership agreement can lay out details regarding decision-making power, management duties and responsibilities. It is a good idea to set any restrictions or power in writing, so there is no confusion over who can do what. As a rule, we rarely allow fifty-fifty ownership, this produces a deadlock with no cheap, fast, reliable resolution. Partners may need to hire lawyers and dissolve the company without a clear decision-making process. However, wise partners can allocate responsibilities based on different task areas and unique partner strengths to avoid conflict and create action.
Avoid confusion about finances
Your agreement can also outline the capital contributions, responsibilities for additional investment and each partner’s return over time. You can specify the profit division and how much each partner must put towards starting up and maintaining the business. Additionally, you can define who has access and control over the business bank accounts or credit cards.
Determine when and how to bring on a new partner
If your business grows or one of you simply wants to add an investor or other financing into the mix, the process of taking on a new partner can be confusing and contentious. A partnership agreement can explain how you decide to let someone else join the partnership. For example, the agreement can require a unanimous vote for such a decision. Placing debt onto a company is one the most important financial transactions a company can make. Ensuring that the process is clearly defined and understood will ensure defined control and risk assessment.
Define an exit plan
Sometimes, partners do not remain in the business forever. Your agreement can spell out the circumstances in which a partner can leave or receive a buyout offer from the business. Additionally, you can decide how to dissolve the company if both partners want to terminate the entity.
Concluding thoughts
The excitement of starting a new partnership can often create a sense among partners that they can resolve all disputes easily. However, it is nearly impossible to predict how people will change and their needs will evolve over time. The legal partnership agreement outlines the company’s best interest at formation and in the future.
