Write a Partnership Agreement
Everything you ever wanted to know about writing a partnership agreement.
If you are currently involved in a partnership, or are thinking about starting up a business as a partnership, you should really take the time to think about how to write a partnership agreement. If you and your partners do not have a partnership agreement in place before you start doing business, you may not be able to handle the problems that will inevitably arise. In addition, without a set of rules in place, even minor disputes could escalate into major problems that could end up dissolving your partnership. Lastly, if you do not have a partnership agreement in place, your partnership may be governed by default rules set out by the state.
What a Partnership Agreement Can Do for Your Business
In its most basic form, a partnership agreement will give you a firm understanding of your business relationship that you have with your partners in your business. Because you will write a partnership agreement in conjunction with your business partners, you will be able to make an agreement that suits all of your needs. The partnership agreement will spell out how the business profits will be divided amongst the partners, the rights and responsibilities of the partners, the procedures to take when a partner leaves the business, and many other important rules and guidelines.
Remember that if you do not have a partnership agreement in place, your partnership will most likely be governed by default rules that are put in place by your state. Generally speaking, these rules are known as "The Uniform Partnership Act," or "The Revised Uniform Partnership Act." These laws will spell out the basic legal rules and regulations that apply to partnerships and will be the controlling laws unless you have a partnership agreement in place that supersedes these default rules.
However, with these default rules in place, it can sometimes be easy to think that they are "good enough," and not write a partnership agreement of your own. Don't fall into this trap. Default rules are like a "one-size-fits-all" shoe and they probably won't work that well for your partnership. In almost all situations, it is better to have your own customized partnership agreement in place that you can rely on.
What you Should Have in your Partnership Agreement
Although there may be other items that you want to include in your partnership agreement, here is a list of some of the most common and prominent items found in partnership agreements:
- The name of your partnership. If you have not done so already, perhaps one of the first things that you and your partners need to sit down and agree on is the name of the partnership. Many partnerships often take the names of their partners, like "Anderson, Young & Franks." However, you can also choose the option of making a fictitious business name, such as "Anderson Pipes and Plumbing," as long as you register the name. However, if you do decide to use a fictitious business name, you must make sure that the name is available for use and has not already been taken.
- The respective contributions of the partners. When a partnership agreement is written, it is important that all the partners get together and agree on who will be making what contributions to the partnership, and what ownership percentage each partner will be entitled to. For example, partner X may be fronting all of the cash while partner Y may be doing all the groundwork to get the business started. If there are disagreements over the initial contributions, your partnership may be doomed before it even starts.
- How the profits, losses and draws will be allocated. Your ownership agreement should set out how the profits and losses will be allocated. One of the most popular methods for allocated profits and losses is to go by ownership percentage. Another question that should be answered is whether every partner will be able to take a regular "draw," a withdrawal from his or her allocated profits, each year, or whether the partners can take their entire allocated profits. If you and your partners have different financial needs, there may be disagreements over this part of the agreement.
- The authority of the partners. Without an agreement that is contrary, any decision of a partner can be binding on the entire partnership, even without getting the other partners to agree. If you want to make sure that no one partner can indebt the entire partnership without the agreement of all the other partners, you need to be sure to include this in your partnership agreement.
- Business decision making powers. Like the power to make decisions about debt, it is important that you decide amongst all the partners how important business decisions will be handled. If you do not want one partner to be able to make important business decisions without consent, then you need to make sure to spell out the business making powers of each partner. One popular method is to require a unanimous vote of all the partners for all important business decisions, but still allowing individual partners to make minor business decisions without a formal vote. However, if you decide to take such an approach, you need to be sure to spell out what constitutes an "important" business decision and what constitutes "minor" business decisions.
- Managing. Although it is probably not a great idea to spell out every detail of management in a partnership agreement (meaning you do not have to dictate who will be making the weekly employee schedules), it would probably be a good idea to assign important management duties, such as who will be keeping the books for the business.
- How to bring in new partners. There may come a time in your business when you want to bring in new partners. If you can agree on this process at the outset, it will probably be much easier when the time rolls around.
- How to deal with the withdrawal or death of a partner. Many partnerships have fallen apart when on partner decides to leave, becomes disabled or dies. You should be sure to have a buyout agreement included in your partnership agreement that deals with such situations.
- How to resolve disputes. As it often happens, there will probably be disputes between the partners in your business. However, if you spell out how you will deal with deadlocked disputes at the outset, you can save a lot of money in the future. For example, instead of allowing the partners to go to court, you could require that arbitration or mediation is used first.
It is important to have this partnership agreement in place before you open up for business. Like sports, it is easier to follow rules and regulations that are already in place rather than having to come up with rules on the fly when disputes arise.