9 Elements of a Solid Partnership Agreement

by | Dec 20, 2018 | Business Agreements

Whether you decide to go into business with your best friend or a stranger, albeit one with the right talents to take your business to the next level, it’s important to hammer out an excellent 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, and 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 essential parts of any solid partnership agreement focus on:

1. What will the firm’s primary mission be?

A set of guidelines or rules should be in place so that disagreements about goals don’t cause business problems.

2. Who will handle what duties?

We always see restaurant parties – only on those celebrity chefs to the rescue shows, of course – which 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, the person in charge could help in the kitchen. That equal division of duties – filling in where needed if you can – is a guiding principle that suits all businesses.

3. When do we talk about finances?

Parties should have in writing who is planning to invest capital and who is contributing differently. In addition, they should have a plan determining what will be considered income. Still, they should also have plans to determine how or when to take withdrawals, handle capital contributions, and report financials to potential investors.

4. Who owns what property?

A division of property is essential from the beginning. This property can include client accounts, computer applications, company names, intellectual property, and tangible property. If the business comes to an end, the relationships won’t.

5. Who will handle banking?

In most cases, it is best to hire someone skilled in numbers. However, if you are just getting started, determine which partner will focus on finance and focus on the creative aspects of the business.

6. How will disputes be tackled?

If a business dispute becomes a problem, having a plan to use a mediator to address such issues could ease potentially permanent deadlocks. A business advisory board can also help handle disagreements.

7. What about a death?

One of the main reasons business partnership agreements are important is in case of a sudden passing. If one of the parties passes away, the other may not be prepared to handle everything. As a result, the business could collapse. This means 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.

8. What if one partner wants out?

Partnership agreements should include how a partnership should be legally dissolved. For example, should the departing party be bought out, or perhaps they still have a share in the business? Albeit, if they maintain shares in the company, it is smaller. They will no longer be investing sweat equity or financial equity into the business. A partnership agreement answers these pertinent questions in advance.

9. 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. These battles are often prevented with just a few sentences as part of necessary legal paperwork. Because partnership agreements are complex and 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.

Contact EmergeCounsel

At EmergeCounsel, we have the experience to help get your new business started on the right foot by helping prepare you for any legal issue that might come your way. If you are in the process of starting a Colorado business, please contact us today to find out more about how we can help may those first steps easier!


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