10 Elements of a Partnership Agreement: What to Include in a Business Partnership Agreement
All business partners should have a contract that outlines their rights and responsibilities within the company. A well-drafted partnership agreement not only ensures that there’s no confusion but also that you can effectively settle conflicts when they arise. But, what should a partnership agreement include?
What do partnership agreements address?
If you plan on going into business with one or more other people, it’s a good idea to form a partnership agreement. But, what issues should be included in a partnership agreement?
Your contract should outline the rules for how you and your partners will manage the business, company responsibilities, ownership, investments, profits, and losses. A written partnership contract helps answer any “what if…” questions before they arise, ensuring that the business runs smoothly.
Partnership agreement checklist: What should a partnership agreement include?
There are 10 elements of a partnership agreement that you must be sure to include when drafting yours:
Your Partnership’s Name
At the start of your contract, you need to state your business name, its purpose, and the names of your partners. This ensures that each party will be held accountable for the terms and provisions of the contract.
Allocations – profits and losses
It’s crucial for your contract to state how the profits and losses of the business will be allocated to each partner. This can include how much each will be paid or how losses will be distributed based on the investment.
Ownership
All business partnership contracts should include an outline of how the ownership of the company is divided. It should also include different scenarios that would influence the division of ownership. For example, how will ownership be divided if a partner wants out or if the company needs to be sold?
Authority
If you want to avoid stepping on each other’s toes, you should set up a decision-making structure in your contract. Ideally, each partner should be able to make decisions based on how much they invested in the company. Setting a foundation for authority before decisions need to be made can prevent future arguments.
Contribution
In case of later disagreement, you want to ensure that each partner’s financial contribution is written into your contract. This is because you may not remember the amount each member invested upon start-up, which could pose an issue when dividing out labor, profits, and losses.
Workload
Division of work between partners is one of the most common causes for disagreements in joint business ventures. Therefore, it’s critical to get this sorted out before you start your company operations. Your agreement should clearly state what each partner will do and whose responsible for what business decisions.
Compensation
The primary goal of any business is to make a profit, but how will these profits be paid out to each partner? And where do you draw the line between income and profits? These are important things to consider in your agreement. That way, you can ensure that each individual is fairly compensated for their efforts.
Dispute Resolution
Many partners prefer not to think about disputes until they become an issue. However, this can lead to significant problems, including litigation and even business failure.
One of the easiest ways to resolve disputes is by turning them over to a predetermined mediator. Another method is to use your business advisory board to give you the best advice on what to do in the situation. Whatever you choose, it’s crucial to ensure it’s written into your contract.
Death
Making arrangements in case of a partner’s death ahead of time may be the difference in your business continuing or collapsing. This means that your contract should include a buyout agreement that specifies what happens in terms of business owners if a partner cannot continue running the company.
New Partners
New partners can arise due to a variety of circumstances, including the death of a partner, someone dropping out of the partnership, or you finding someone interested in investing in your company. This is why you should state what you will do if new partners join the business in your agreement. How will they be paid? What level of authority will they have?
The consequences of not including the essential elements of a partnership agreement
When your partnership agreement is unclear or even nonexistent, it can lead to major issues down the road, including major disagreements about each partner’s role, compensation, authority, etc.
To ensure that you include all the elements of a partnership agreement in your contract, you should use contract management software during drafting, negotiating, and signing. With contract tools, you can ensure that you have the best agreement possible so you and your partners can focus on business operations.
