Partnership Agreements in Small Business
When starting a small business, partnerships can be a great way to share the workload, pool resources, and bring diverse skills and perspectives to the table. However, without a clear partnership agreement, things can quickly go awry and put the business at risk. In this article, we’ll explore what partnership agreements are, why they’re important, and how to create one for your small business.
What is a partnership agreement?
A partnership agreement is a legal document that outlines the rights, responsibilities, and expectations of each partner in a small business. It covers a wide range of topics, including:
– Each partner’s role in the business
– How profits and losses will be shared
– How decisions will be made and disputes resolved
– What happens if one partner wants to leave or sell their stake in the business
– How new partners can be added to the business
– How the business will be dissolved if necessary
Why do you need a partnership agreement?
There are several reasons why a partnership agreement is essential for any small business with two or more owners:
– Clarifies expectations: By outlining each partner’s role and responsibilities, a partnership agreement can help avoid misunderstandings and conflicts down the road.
– Protects the business: A partnership agreement can provide a roadmap for how to handle disputes, protect the business in case of a partner leaving, and ensure that the business can continue operating seamlessly.
– Improves decision-making: By establishing a clear process for decision-making, a partnership agreement can help the business make decisions more efficiently and effectively.
– Required by law: Depending on the state in which your business is formed, a partnership agreement may be required by law.
How to create a partnership agreement
When creating a partnership agreement, you have a few options. You could consult with a lawyer to draft a custom agreement that suits your business’s specific needs. However, this can be expensive and time-consuming, especially for small businesses on a tight budget.
Alternatively, you could use a partnership agreement template to create a basic agreement that covers the essential elements. There are many templates available online, but be sure to choose one that is tailored to your state’s laws and regulations.
Here are the key elements that should be included in any partnership agreement:
1. Partnership type: There are several types of partnerships, including general partnerships, limited partnerships, and limited liability partnerships. Be sure to specify which type of partnership your business is forming.
2. Roles and responsibilities: Outline each partner’s role in the business, including their duties, obligations, and decision-making power.
3. Profit and loss sharing: Specify how profits and losses will be shared among partners. This can be based on each partner’s contribution to the business, or it can be split evenly.
4. Decision-making: Establish a process for making decisions, including who has the final say in certain matters.
5. Dispute resolution: Describe how disputes between partners will be resolved, including whether or not mediation or arbitration will be used.
6. Adding or removing partners: Describe the process for adding new partners to the business, as well as how a partner can sell their stake or leave the business.
7. Business dissolution: Provide a plan for what happens if the business needs to be dissolved, including how assets will be distributed and how outstanding debts will be paid.
Conclusion
Partnerships can be a powerful tool for small businesses, but they need a strong foundation to succeed. A partnership agreement can provide that foundation by clarifying expectations, protecting the business, improving decision-making, and ensuring compliance with legal requirements. Whether you choose to draft a custom agreement with a lawyer or use a template, be sure to include all of the key elements to set your business up for success.