How To Create A Partnership Agreement
Apr 01, 2019 10:19 PM EDT
Creating a partnership agreement is an essential part of becoming a legitimate business, yet many entrepreneurs who are interested in working together to achieve their commercial dreams have little idea of where to start when it comes to forging a solid agreement. The ins and outs of the legal process can be dizzying, and the commonly-made mistakes that plague many partnership agreements act as landmines which can destroy your business if you're not careful.
Nevertheless, the right partnership agreement can take your business to new heights and guarantee that both you and your co-owner(s) get their fair share of work, authority, and profits. Here's how to create a partnership agreement that won't disappoint you.
Each state is different
One of the first things you'll encounter when creating a partnership agreement is the fact that most states have their own unique regulations pertaining to these deals. Most states include a generic set of legal rules that will apply to your agreement unless you and your partner create a specific written partnership agreement that outlines your arrangement in detail. It's imperative to understand that you don't want to just blindly accept the rules that state is handing out - good partnership agreements are tailor-made for the partners in question.
After you've settled on a name for your partnership (including determine who gets to put their name first!) you need to iron out the real work - determining the contributions of each partner. Whether you're shelling out cash, equipment, land, or anything else, you'll need to specifically detail what each partner is contributing to your agreement. This is one of the most fraught parts of the process, as disagreeing over who's going to contribute what can tank even the most robust of business partnerships.
For most people, this is the ideal time to review some clauses that can help you avoid or resolve disputes whenever they occur. The wording of your partnership agreement is vitally important, so make sure that all parties involved have an opportunity to thoroughly review and contribute to the document before finalizing your decision. At this stage in the process, delegating authority and determining who's putting forward cash (and how much, exactly, they're putting forward) is advised to take these issues off the table in future arguments.
Outside of commonly made mistakes, you also need to review more specific legal mistakes which could jeopardize the longevity of your partnership agreement. Not having a shared understanding of the liability involved in your partnership agreement can create a huge legal fight in the event of your business' failure, for instance. Elsewhere, certain things like a non-compete agreement can help guarantee that your partners are entirely onboard and unlikely to ditch your operation once it's launched.
Getting the most out of your partnership
Getting the most out of your partnership entails getting past the commonly-made mistakes and forging a tight agreement that clearly elucidates who does what on a daily basis. Your partnership agreement, like small business loans, should delegate daily decision-making authority but also include a clause about how your partnership will react to sudden, dire changes in the business cycle. Furthermore, you should pay close attention to the dispute resolution part of your partnership agreement, as this is how you and your partners will hash out your disagreements should you ever encounter any down the line.
If you're feeling good about your partnership agreement, don't be afraid to include a clause about admitting new partners in the future. After all, many business relationships start small and grow over time, with new members joining the team as is necessary. You and your partner need to agree on a procedure for admitting additional partners in the future if you have hopes to grow your joint venture. This is also a great time to review partnership buyout agreements, which any document should include in case you or another partner want to abandon the agreement without leaving the other person empty-handed.
Finally, while you can find plenty of helpful templates online, most of those will be boilerplate agreements that are largely unsuitable for your commercial arrangement. It can't be stressed enough that you and your partner want a custom agreement tailor-made for your relationship. In this regard, finding legal assistance when drafting the agreement is highly recommended. Before long, you and your new partner will be conquering the business world hand in hand.