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5 key things to put in a partnership agreement

On Behalf of | May 1, 2024 | Business Law

No matter how much you like or love your business partner, the days of handshake agreements are long past. Whatever your agreements, you need to get it in writing.

That’s what partnership agreements are all about. Crafted while times are good and everybody wants the best for the business and each other, these agreements can come to the rescue if there are disputes down the line and keep disagreements from tearing the company apart.

Aside from defining ownership amounts between the partners, here are five key issues that should be discussed:

#1. Which partner controls what aspect of the business

Clearly define each partner’s roles, responsibilities and obligations within the partnership. This includes duties related to management, decision-making and creative control. You don’t want to expect a “silent” partner and end up with one that inserts themselves into the daily operations.

#2. How profits and losses will be distributed

This is very important to spell out, since financial issues can prove rapidly fatal to a partnership. 

Specify how profits and losses will be distributed, whether that’s based on the percentage of ownership, capital contributions or some other, agreed-upon criteria.

#3. Who has what authority over decisions

Do each of you have unilateral binding power over the business? Is it joint or nothing? Establish your decision-making processes early to ensure smooth operations and prevent conflicts. This includes outlining how investments, expansions or changes in business structure will be decided, and whether decisions require unanimous consent.

#4. How disputes will be resolved

Disagreements are inevitable, so include procedures for resolving disputes with your partner. Clearly outline the steps to be taken if disagreements arise, including escalation procedures and mechanisms for resolving conflicts amicably.

#5. Discuss how you can get out

All good things must come to an end, eventually, so have an exit strategy that takes into account the withdrawal, incapacity or death of each partner. Include provisions for how a partner can exit the partnership, including buyout mechanisms and valuation methods.

Crafting a solid partnership agreement takes experience. It’s easier when you have the right legal guidance.