3 JULY 2018
You've got a great idea for a business. And you know exactly who you want to do it with.
Trouble is, you need to jump through the legal hoops first.
This is part of establishing a partnership agreement, and it's vital to the success of your business. Keep reading to find out what a partnership agreement is, what it includes, and why you need one.
What is a Partnership Agreement?
First things first: what is a partnership agreement?
A partnership agreement is a written document detailing the exact relationship between business partners. It also covers the requirements and expected contributions of each individual partner to the business.
You can think of it like a roadmap to your business partnership. It's an exact outline as to what will happen if a certain situation arises, or rather, any situation that could arise during the lifetime of the partnership.
This could cover anything from the day-to-day business matters to what will happen if you decide to dissolve your partnership.
What It Includes
Because of this, a business partnership agreement can be rather broad. Remember, it's a roadmap to the entire lifetime of your partnership, and a good agreement is designed to deal with any possible situation.
For example, it can include things as basic as the name of your partnership, details of the partnership, and the designated roles of the partners.
But it can also cover more complex information like the management of the partnership, the process for decision making in the business, profit distributions, financial reporting, even the transfer of partnership interests and the termination of the partnership.
When You Should Get a Business Partnership Agreement
Ideally, you should develop a partnership agreement early in the game.
In a lot of ways, business partnerships are like personal partnerships with more codified rules and understandings. The difference is that business partnerships should have it in writing so as to avoid any potential misunderstandings.
For this reason, you should start to write a partnership agreement as soon as you start to formally pull your business partnership together. This will help clarify any potential issues before they arise and help eliminate potential problems later on
Why You Should Have a Partnership Agreement
Now, let's talk about why you should have a partnership agreement.
Maybe you're forming a partnership with your best friend. Maybe you're forming a business with the savviest businessperson you've ever met. Maybe you're two businesspeople whose skills complement each other nicely.
Or maybe you're just two people really excited about the same idea and you can't wait to make it happen.
Either way, if you're going to form a partnership, you're going to need a formal agreement.
No matter how well you know your partner or solid your partnership is in the beginning, you need to have an agreement.
Here, we're breaking down four reasons why.
One Size Does Not Fit All
One of the biggest mistakes that partners make when they decide to go into business together is thinking that all partnerships are the same and that partnership agreements are one-size-fits-all.
In reality, every partnership is as unique as the people in it, and it should be treated as such. Some standard structures can be reused in a partnership, but most other aspects of the agreement should change based on the partners' interests, circumstances, opinions, and business goals.
If you don't consider the uniqueness of each partner when establishing your business, you're setting yourself up for issues later on.
Agree on Important Issues in Advance
A written agreement does two key things for a partnership:
While no one wants to think about the unpleasant potential situations that could arise, it's better to have these conversations before things go sideways.
For example, one of the most important provisions you can include in an agreement is how to handle disputes. Without anything set in writing, it becomes extremely difficult to avoid costly litigation and arbitrate disputes. You may not even have a set way to make decisions in the event of a dispute.
Basically, if you don't have the ugly conversations early, things will just get messier later.
To Remove Partners
Another one of the not-fun conversations that a partnership agreement can address is what happens if you need to remove a partner?
No one likes to think about the potential dissolution of an idea or business partnership that they're excited about. But reality doesn't always align with your good intentions, and if your business doesn't perform as well as you'd hoped, a partner may be tempted to stop working for your company.
A well-drafted partnership agreement should include provisions for removing a non-performing or disruptive partner. Otherwise, it could do serious damage to your business interests.
To Protect the Business and the Partners' Investment
This brings us to the final reason why you need a partnership agreement--really, the central reason you should have such an agreement.
To protect the interests of your business and your partners' investments.
Any number of events could have a negative impact on your business performance. A partner's death, for example, or a personal bankruptcy, or a key partner no longer wanting to do business.
Without an agreement, such events could cripple your business. Provisions addressing situations like this will help bring stability and security when you need them the most.
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