Whether you decide to go into business with your best friend or a complete stranger, albeit one with the right talents to take your business to the next level, it’s important to hammer out a great agreement between the parties before launching the business.
All other things being equal, we suggest any partnership be structured as a limited liability company to avoid any undue personal liability of the parties, take advantage of tax benefits as well as best define all party member’s monetary contributions and roles. When parties form an LLC, they are called members and/or managers..
Regardless of whether you decide to form an LLC or have a general partnership, memorializing the agreement in writing serves as a way to be prepared for the unexpected, such as one party member’s death, a desire to dissolve the business, or various disputes. Some of the most important parts of any solid partnership agreement focus on:
- What will the firm’s main mission be? A set of guidelines or rules should be in place so that disagreements about goals don’t cause business problems.
- Who will handle what duties? We always see restaurant parties – only on those celebrity chef to the rescue shows, of course – who separate duties in a way that is not all that strategic when it comes to time management. When the front of the house is quiet, for example, the person in charge could help in the kitchen. That equal division of duties – and filling in where needed if you can – is a guiding principle that suits all businesses.
- When do we talk about finances? Parties should have in writing who is planning to invest capital and who is contributing in a different way. They should not only have a plan determining what will be considered income, they should also have plans in place to determine how or when to take withdrawals, how to handle capital contributions, and when to report financials to potential investors.
- Who owns what property? A division of property – clients, computer applications, company names, intellectual property, and tangible property – is important from the beginning, so that if the business comes to an end, the relationships won’t.
- Who will handle banking? In most cases, it is best to hire someone who is skilled in numbers, but if you are just getting started, determine which partner will focus on finance, and which will focus on the creative aspects of the business.
- How will disputes be tackled? If a business dispute becomes a problem, having a plan in place to use a mediator to address such issues could ease potentially permanent deadlocks. A business advisory board can also help handle disagreements.
- What about a death? One of the main reasons business partnership agreements are important is because if one of the parties passes away, the other may not be prepared to handle everything and the business could collapse, meaning all the hard work and effort spent building it may not be enough to save it. Planning appropriately – life insurance could be a consideration – could save the business.
- What if one partner wants out? Partnership agreements should include how a partnership should be legally dissolved. Should the departing party be bought out or should he or she instead still have a share in the business, albeit a lesser one since he or she will no longer be investing sweat equity or financial equity into the business? A partnership agreement answers these pertinent questions in advance.
- What if we decide to sell? All aspects of a sale – even if you never expect that an offer worth considering will come – should be part of the partnership agreement, so there is agreement at a time when emotions can turn a deal into something contentious.
Without a well-written, detailed agreement, all parties involved could end up in a court battle that could have been prevented with just a few sentences as part of necessary legal paperwork. Because partnership agreements are complex and so important, it’s a good idea to have an attorney draw up your paperwork so it is cohesive and covers all aspects of what is most important to you.
At EmergeCounsel, we have the experience to help get your new business started off on the right foot by helping prepare you for any legal issue that might come your way. If you are in the processing of starting a Colorado business, please contact us today to find out more about how we can help may those first steps easier!