Partnership Agreements: Who Needs One?
If you have a partnership, you need a Partnership Agreement. Successful entrepreneurs agree that good planning is a fundamental ingredient of any business venture. With partners you need a means by which to clarify the parameters of your relationship, and resolve disputes that will likely occur. Every partnership, from time to time, will involve disagreements, misunderstandings and, perhaps, outright warfare. A properly prepared Partnership Agreement will reduce or eliminate the risk of these difficulties threatening an otherwise efficient business relationship.
The best time to work out compromise and achieve a Partnership Agreement is when harmony and goodwill are in abundance, not after difficulties have arisen. Then, it may be too late.
A good Partnership Agreement clearly establishes the fundamental rules under which the partnership operates. Your Partnership Agreement should settle the following issues:
Responsibilities, Performance, and Remuneration:
The role of each partner, their responsibilities and level of performance should be established. The agreement must clearly set out the income of the partners, capital reserves and a formula for distribution of profits.
The initial capital contribution of each partner may vary, resulting in different levels of investment. Capital may also come through partner loans and, in such instances, the terms of repayment and security are essential to any agreement. If, from time to time, the partners will be expected to make additional capital investment, this too would be dealt with in your agreement.
Buy/Sell and New Partners:
For a partnership to be successful, the partners must be committed. On the other hand, this commitment need not be either lifelong or absolute. From the outset, partners should agree on the minimum length of commitment and on how the partnership will treat retiring partners and those partners who wish to sell their interests. Is yours a partnership requiring the full-time commitment of the partners or, are other business activities of the partners permitted? Surviving partners may wish to have a say in the admittance of new partners or the sale of partnership interests; after all, a close working relationship usually exists between partners.
Most partnerships operate on the basis of consensus management. However, there may be a time when you are unable to achieve a compromise that all partners can live with. This can spell disaster for the business unless some mechanism exists for resolving disputes. Such a mechanism should be formalised in the Partnership Agreement. Occasionally, irreconcilable differences that cannot be resolved by any means lead to the termination of the partnership. A properly drafted Partnership Agreement will provide for dispute resolution, and prevent destruction of the business in such instances. For those disagreements where no resolution exists, your Partnership Agreement will provide a mechanism for the dissolution of the partnership that is fair and allows for the continuation of the business by some of the partners.
Depending on the level of complexity, a solid, carefully prepared Partnership Agreement can be negotiated and prepared for about $750. The exercise of negotiating the agreement will resolve many potential disputes before they arise. The agreement will provide the partners with a strong tool by which to administer the partnership, enhancing its viability and success.