A partnership agreement formalises the business relationship between two partners. It can cover everything from low-level processes, up to how dispute resolution will take place in the business.
Business partners are personally liable for the business in a partnership, therefore, determining the finer details is extremely important and can prevent complications down the line. The agreement will help allocate the responsibilities and obligations of each partner. It will also help establish the rights of each partner and how profits and losses will be distributed amongst partners.
An agreement should take the following into consideration for it to be an effective piece of documentation:
- Percentage of ownership: How much will each partner contribute to the business? This contribution could be in the form of capital or equipment and service – regardless, this will determine how much ownership of the business the partner has.
- Division of profit and loss: Allocation of profits and losses might simply follow the ownership percentages or simply be equal between partners. Regardless of how the division will be allocated, it is important to clearly identify this in the agreement.
- Length of partnership: The agreement could be for an unspecified amount of time, or the design of the business could lend itself to be dissolved after a given period of time. This should be in the agreement – including if the time frame is unspecified.
- Decision making and dispute resolution: Outlining a decision-making process and instructions on how disputes between partners should be resolved is extremely important. A meditation clause will help with resolution without the interference of the court.
- Authority: A ‘binding power’ should be included in the agreement which allocates partner authority. If a business is bound to a debt or other contractual agreement, this can expose the company to unmanageable risks. Including terms that state which partners hold the authority to bind the company and what would need to be done in those situations will assist with reducing or avoiding these risks.
- Withdrawal or death: The procedures for handling the departure or death of a partner should be stated in the agreement. This could involve how the valuation process will take place and might need each partner to maintain a life insurance policy as well as a designated beneficiary.