Business Partnership Contracts: Everything You Need to Know
Business partnership contracts are agreements between two or more business partners that establish various rights and responsibilities for the partnership. 3 min read
Business partnership contracts are agreements between two or more business partners that establish various rights and responsibilities for the partnership. A partnership agreement is also called any of the following:
- Business partnership agreement
- Partnership contract
- General partnership agreement
- Articles of partnership
It's important to clearly define how you'll run the partnership, and clear communication and a solid legal foundation are musts for getting your business off to a good start. Partnership contracts can do the following:
- Plan how a partner leaves the business
- Prepare for common business scenarios
- Outline the handling of disproportionate partnership contribution
When you lay out clear business expectations in your agreement, you can cut down on everyday misunderstandings. Some states require partnerships to have these agreements in place when forming the business. Whether you run a business with a spouse, family member, or friend, it's a good idea to have a partnership contract.
Things to Include in a Business Partnership Agreement
Your partnership agreement should include the following:
- The name of the company
- Alternate and/or fictitious names, if any
- The name of the parent company, if any
- The company's purpose
Decide who will be responsible for the various parts of the business. One partner may have several responsibilities. Sometimes, responsibilities will overlap in day-to-day operations. Depending on your business, partners may be any of the following:
You should list how business property is owned and used, as well as come to an agreement on how partners will share ownership. 50/50 ownership isn't always the best way to go. A partner should get a larger ownership share if he or she did or does any of the following:
- Contributed a significantly larger amount of cash or property to the business
- Came up with the original business concept or secured a patent, developed a beta product, or completed another crucial first step
- Works another full-time job while other partners work part-time
- Raised venture capital successfully
While collaboration will probably happen easily most of the time, disputes may arise on occasion. The agreement should outline a method for dispute resolution. When partners share 50/50 responsibility, they may reach an impasse when a disagreement arises.
Some better ways to handle conflicts include the following:
- Giving the CEO the final say
- Giving one partner final say on a particular part of the business, i.e., hiring and firing
- Voting based on ownership, so a partner with 60% ownership has more say than the 40% partner
- Using an outside mentor to resolve disputes
- Using an outside advisory board
More formal options for dispute resolution include the following:
One of the most important parts of your partnership agreement will be the delegation of power pertaining to committing to contracts and spending. When one partner takes action, all are responsible legally and financially, so this is a big consideration.
Partnership contracts should include buy-sell agreements to prevent issues related to partner death or disability. A buy-sell agreement gives remaining partners the chance to buy out the partner who died or who is disabled.
Your contact should also include details if a partner exits the partnership voluntarily or involuntarily.
If your partnership grows, you'll have to address the addition of new partners and acquiring other partnerships. Common questions to help you shape this process include the following:
- What's the process for bringing in another partner?
- Who has power to add partners?
- How will we handle changes in responsibilities?
- How will voting be affected?
Any issues related to the sale of the business should be covered in the buy-sell agreement because a lot of money could be at stake. This could be a major source of disagreement between partners, so make sure this part of the contract is very detailed and specific.
A partnership may be dissolved in the following ways:
- Its purpose has been fulfilled.
- All projects have been completed.
- All partners agree to a specific end date.
- A partner dies.
- A partner withdraws.
- A partner/the partnership goes bankrupt.
Even the best business partnerships require some rules and guidelines. By putting terms and conditions on paper, you'll be able to run your business more smoothly, with a way to handle disputes already in place.
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