Partnership Agreement: Tips What to Include in the Agreement

At one time or another, we have all had to work with a partner. Maybe it was a teammate or a coworker, or someone who you worked with on a school project. A partner has the ability to be a great asset who provides extra knowledge, resources, and skills… as long as you choose the right one. In business, choosing the right partner is essential for the success of your endeavor. However, when there is more than one person running a business and making important decisions, it is imperative that certain issues be addressed before you roll up your sleeves and get to work. These issues can and should be addressed in a partnership agreement.

We’ve broken down the seven essential items that should be included in your partnership agreement so you can confidently begin your partnership on the right foot.

1. Contributions
First, it’s important to identify the details of each partner’s finances so you both understand how much each partner will contribute to start the business. Additionally, you should decide what each partner’s responsibilities will be for making future contributions to the business – both financially and otherwise. Basically, you want to have a clear understanding of exactly what each partner will be giving to the business in terms of money, time, effort, resources and equipment, customers and/or accounts, etc.

2. Ownership
No matter how much you may like your business partner or your business itself, sometimes, things happen. They may be exciting things, like taking on a new business partner or even multiple partners. They may be planned things, like selling the business. Or they may be unforeseen things, like your partner deciding to withdraw from the business. Regardless of what happens, it is important to determine who gets what if the business ownership changes in any way. That’s why your partnership agreement should describe how ownership interests would be handled in situations such as the ones mentioned above. Moreover, other situations like the death or retirement of a partner or the bankruptcy of the business should also be considered. If you want to be extra safe, you may want to consider adding a non-compete clause to your partnership agreement. This clause protects your business from a partner leaving, setting up a new company, and stealing your customers and/or accounts. Like we said, things happen!

3. Decision Making
Just in case you and your partner don’t agree on everything (because, well, you won’t), you need to determine how decisions will be made on both a day-to-day and long-term basis. It’s important to define what kinds of decisions need to be agreed upon by both partners, and which decisions can just be made by one partner alone. We promise – including this in your partnership agreement is a very good idea.

4. Distributions
Your partnership agreement should very clearly state how each partner will split the business profits. This includes who gets paid, how much they get paid, and when they get paid. It’s also important to specify if each partner gets paid an hourly wage or a salary, and what the total amount of their earnings will be.

5. Critical Developments
This is where you and your partner plan for the unpredictable, such as what happens if a partner gets sick or passes away or if someone buys out your business. Be sure to include any other circumstances or issues that you can think of!

6. Dispute Resolution
So, we’ve already mentioned that in business, things happen, and regardless of what happens, you probably won’t agree with your business partner on every single matter. Because of this, it’s essential for your business plan to have a section dedicated to dispute resolution. This means you need to clearly lay out the terms of how disputes will be handled between partners.

7. Dissolution

Finally, your partnership agreement should include what steps will be taken to legally end your partnership if or when that time comes. In particular, you should research and familiarize yourself with that your specific state requires to dissolve partnerships, as this varies from state to state.