Before you and your partner start up your new business, you should consider creating a partnership agreement. A partnership agreement can be a useful tool to prevent unnecessary turbulence for your business by setting out plans for how to navigate various situations that may arise. It can also be helpful in avoiding miscommunication between you and your partner.
Partnership agreements can be complicated because they aim to cover such a wide variety of possible situations. However, most partnership agreements should cover what is expected of each partner, how the profits and losses will be distributed, how ownership of the business could be affected by certain scenarios and what the protocol is for resolving disputes.
Your partnership agreement should clearly state the level of authority and decision-making power each partner has in the business. It should also list each person’s important management responsibilities, as well as each person’s expected contributions of time, money or equipment.
In general, money can be the root of all kinds of arguments. This is why it is important that your partnership agreement describes how the business’s profits and losses will be split. This includes how much each person is paid, when each person is paid and, depending on your business structure, who is responsible for the business’s liabilities.
The percentage of ownership each person has is obviously important to include in a partnership agreement, but you should also include how ownership could change in various scenarios. For example, what happens if your partner retires, dies or otherwise withdraws from the company? Can one partner buy out the other? Is it possible for additional partners to join the business? If the business is sold, who gets what?
It is unlikely you and your partner will never disagree about the business. Knowing it will probably crop up eventually, it is prudent to address in your partnership agreement how will disputes be handled and what that resolution process looks like. You should also address what steps should be taken to legally end the partnership, in case it comes to that.
Even if it is uncomfortable to do so, your partnership agreement should address many potential scenarios, both positive and negative. With a partnership agreement, you and your partner will avoid unnecessary miscommunications and be better prepared to handle a variety of challenges your business could face.