Starting a business with a partner? You’re probably excited and optimistic, and focusing on how successful you expect to be. It may be difficult to talk about potential problems during your honeymoon stage, but that’s exactly when you should. A written partnership agreement helps guide you when questions arise.
A good business partnership agreement should answer the following questions:
- What is each partner’s investment? Is one investing cash and the other energy? Do any of the partners own equipment that you’ll use in the business, and does that fact deserve consideration as part of the start-up investment?
- What are the responsibilities and duties of each partner? Be specific about each partner’s role in the day-to-day operations of the company. Consider establishing a procedure for those roles to change as the business evolves.
- If a partner becomes disabled, how long will he or she get a share of the profits? If a partner dies, what happens to that share? A good way to deal with this issue: life insurance on all partners with the company as the beneficiary.
- Can the partners have other outside partnership interests? In particular, can interest be in those similar or competitive businesses?
- What will you do if one partner wants to withdraw? Typically, you’ll set up a buyout agreement, but it’s a very good idea to decide on the terms before the situation arises. You’ll also want to include a non-compete covenant.
- How will you restrict partnership-interest transfers? Can a partner transfer his or her ownership to anyone, or can you limit that transfer? This means the remaining partners won’t find themselves in partnership with someone they object to. This is frequently used to protect the business in the event that one of the partners gets a divorce and his interest becomes a part of the divorce settlement, or in the event a partner dies and leaves his interest in the company to a spouse or child.
- Can a partner pledge his or her interest as collateral for a loan?
- Are additional contributions mandatory? If the business needs capital in the future, are partners required to make capital contributions?
- How will conflicts be resolved? Most often, an arbitrator is used.
Every business partnership–regardless of the relationship of the individuals–should begin with a written agreement. It ensures that the partners have the same vision. But there’s another reason for a partnership agreement. Poorly drawn agreements keep litigation attorneys in business. The best reason to have a good agreement is to avoid the legal fees when you have a meltdown.