Don’t Underestimate a Partnership Agreement

While a business partner should balance your strengths, they should also be willing to communicate freely and often with you. That includes sitting down and hammering out important issues that will be documented in a partnership agreement.

Creating your partnership agreement

The need for a partnership agreement can be summed up in two words: Things change. You and your partner may agree about everything now, but disagreements and unexpected events are inevitable.

So what should a partnership agreement contain? Basic provisions usually include:

  • All parties to the agreement
  • The name, purpose and location of the business
  • The division of management responsibilities

The agreement should also indicate what initial capital contributions (or services instead of capital) will be made, when additional capital contributions will be required, and how profits and losses will be shared.

Beyond the basics

In addition, a partnership agreement should anticipate major business changes and spell out how to deal with them. Questions to discuss include:

  • What are the rights and obligations of the other partner if one partner dies?
  • Under what circumstances can a partner leave, retire or be expelled?
  • What are the financial arrangements for departing partners?
  • How long must an ex-partner wait before starting a competing business?

A partnership agreement can’t address every possible contingency, so consider an arbitration clause to handle disputes that you and your partner aren’t able to resolve on your own. Without such a clause, your only alternative could be costly litigation.

Your business will run more smoothly with a carefully designed partnership agreement. Your attorney can assist you with the legal aspects of the agreement. Please call with questions regarding your finance and tax-related agreement issues.