When starting a business with partners, always draw up and sign a written partnership agreement. It doesn’t matter if your partners are close friends, family members or others that you trust. Disagreements and unforeseen events are inevitable, and it’s important that all partners negotiate and agree on how to settle any potential disputes before they happen. Otherwise, you might find yourself involved in a protracted and costly legal battle that could destroy your relationships and your company.
Below are the clauses every partnership agreement needs to include. Work these details out with your partners, and you’ll be setting yourselves up for a greater chance of success.
You will need to hammer out the details of how you and your partners will make decisions, says startup attorney Megan Eiss-Proctor. What will you do when there isn’t consensus among partners on important decisions? Should there be unanimous consent? What constitutes an important decision?
- Deadlocked decisions. Make sure to include a clause that specifies how you will handle deadlocked disputes, says small business lawyer Aditi Mukherji. Rather than go straight to court, you and your partners should try arbitration or mediation first.
- Partnership binding decisions. For the most part, any partner is legally allowed to make a decision that would end up binding the rest of the partnership. For example, a partner could take out a large loan that your startup can’t afford, and all of the partners would be liable for the risk incurred. Thus, make sure you spell out the buy-in a partner needs from other partners in order to make certain decisions, says ItsYourBiz.com CEO and co-founder Susan Solovic.
You should never assume that all partners are 100 percent clear on their roles in the business. There will always be responsibilities that remain uncertain until they are explicitly written out and agreed to, says Mukherji. Thus, in order to avoid future feuds, make sure to stipulate the exact duties of each partner, including:
- Level of authority
- Business decision-making power
- Important management duties
- Exact responsibilities
A partnership agreement should state what each partner will contribute to the business and what they are entitled to in return. This section should include clauses pertaining to:
- Partner Contribution. Make explicit how much each partner is contributing. While cash is the most common contribution, property, securities, assets, time and even skills are valid business contributions, says Mukherji. Also determine if there will be any scenarios that will require additional future contributions.
- Ownership share. Spell out how much of the business each partner owns. Check out our guide on how to best split up equity amongst founders for more guidance.
Each partner should have a clear idea of how they will make money from the partnership. Along with agreeing to a salary, stipulate how and when partners can expect to get compensated for their investments. Determine how the company’s profits — and losses — will be allocated to each partner based on their contributions.
No one wants to think about what happens to the business in the case you or one of your partners dies or becomes disabled. However, it’s in everyone’s best interest to have a plan in place in case tragedy strikes. Otherwise, the other partners might disagree on how to handle such an event.
“Insurance, trusts, and wills all come into play on this topic, so you’ll have to think through who in your life you trust to make decisions on your behalf,” says Eiss-Proctor. Determine who would inherit your shares and if you’d want your beneficiaries (or your partners’ beneficiaries) to have a say in what happens to the company.
There might come a time when you or one of your partners simply wants to leave the business. Rather than have an angry debate at that time about how to dissolve the partnership, Eiss-Proctor advises partners to agree on the rules of exiting the partnership from the very beginning. For more help on how to plan for cases of death, disability or dissolution, take a look at our post on buy-sell agreements.
As you can see, formalizing a partnership agreement involves some uncomfortable conversations. However, by putting these arrangements in place, you will have the trust and expectations necessary to build a successful business.
Found the perfect business partners? Contact an UpCounsel contracts and business agreements attorney to draft the partnership agreement you need for a productive and successful business relationship.