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What should your partnership agreement address?

On Behalf of | Jul 20, 2023 | Business Formation |

When starting a business with a partner, one of the most important contracts that you’re going to write is your partnership agreement. This contract helps to define the roles that each of you will have within this new business. It can be tempting to skip this step and simply move forward with a handshake deal, but it’s much better to have an official agreement in place.

What should this partnership agreement include? These are a few key elements that must be contemplated in order for all parties to better protect their interests.

Ownership percentages

First and foremost, both of you are going to be investing time and money in this business. You need to know exactly what ownership percentage you’re getting for that investment. This is also important if ownership is going to be split up in any other way than 50-50. The majority owner will be in a stronger legal position to be able to make decisions for the business unless your agreement explicitly indicates otherwise.

Profits and losses

Additionally, you’ll need to define what you’re going to do with the profits and losses accumulated by the business. Will each of you take a salary? Or are you simply planning on splitting up the money that the business earns? Who will be responsible for its debt? What happens if the company makes more money than you pay out in wages and you want to reinvest it in the business? It’s important to talk about all of these financial issues in advance and to agree to a plan in writing.

Disputes and departures

Finally, your partnership agreement should talk about dispute resolution tactics and what to do if the two of you can’t agree. You also want to address how someone should go about leaving the relationship, should they want to walk away from the business. Can they take their investment out? Do they have to give the other person a certain amount of advance notice? Making these decisions while you are still on good terms will be much better than making them once a dispute has arisen.

Crafting a partnership agreement can be a complicated business. Seeking legal guidance will empower both you and your partner(s) to make informed, enforceable decisions that safeguard your interests.