Elements of creating a sound partnership agreement

A partnership can be an exciting way to begin your business. Whether you join forces with a friend, family member, former colleague or another connection, the two of you may share a similar vision and bring valuable resources, skills and experience to your budding business.

However, as ideal as your partnership may seem now, things can eventually sour. To guard against the possibility of a future disintegrating partnership, establishing a sound partnership agreement can help to mitigate risk and create a plan for future uncertainty. Below are some critical elements to consider:

Establish a percentage of ownership between partners

When two partners create a business, establishing an equal share of ownership may seem logical. Instead of immediately committing to a 50-50 split, keep detailed records of each partner’s contributions to the business, especially before the business is up and running. Listing each partner’s contributions of capital, equipment, sweat equity and more can help to distinguish a fair percentage of ownership.

Create a strategy for decision making

A fair percentage of ownership split can also aid in establishing authority among owners, which can benefit a plan for decision making. A 50-50 ownership split can make for difficult decision making. Create a strategy for stalemates on important decisions, whether this includes involving the opinion of an outside board, giving one partner more authority over the other and more.

Have a plan for an exit from the business or death

What happens if one partner eventually wishes to exit the business or unexpectedly passes away? Plan for such unknowns by creating a detailed exit strategy for each partner. This could include a buy-sell agreement where one party has the option to buy out the other. Having a proactive plan in place can help to avoid uncertainty in a turbulent time.

Work with an attorney to create a partnership agreement

Discussing all of these considerations and more may seem productive. However, partnerships can fall victim to the “handshake” agreement, where partners fail to create a legally binding agreement in exchange for trust in the other to stay true to their word.

A partnership agreement lists out the core duties and responsibilities of each partner. Included in these terms can also be a strategy for confronting an eventual dispute between partners. Work with a mutually agreed-upon attorney to incorporate the detailed, comprehensive terms unique to your business in your legal agreement.

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