Smart Business

A business partnership needs a written agreement

Say you’re planning to start a business or expand an existing one. You don’t want to go it alone, but you’re not sure how to choose a business partner. A friend might seem like an ideal choice for partner, since you probably have similar personalities and interests. But the qualities that make for a good friendship don’t always translate into a successful business partnership.

Balance. A business partner should balance your skills and strengths. For example, if you’re good with finances, your partner should be good at marketing. If you like to tackle ten different projects at once, a more methodical partner might be a good balance.
Communication. A good partner should be willing to communicate freely and often. Friends often assume that they think alike, so they never get around to discussing important business issues. For example, if your prospective partner plans to retire before you do, what will happen to the business? What if you want to build a large company, but your partner wants to keep things small? Hammer out important issues like these before you get started, and document your understanding in a partnership agreement.
The partnership agreement. The need for a partnership agreement can be summed up in two words: things change. You and your partner/s may agree about everything now, but disputes could arise later on. Or one of you could die unexpectedly, leaving the survivor/s to deal with the deceased partner’s heirs.

What should a partnership agreement contain? Basic provisions include the parties to the agreement, the name, purpose, and location of the business, and the division of management responsibilities. The agreement should also indicate what initial capital contributions (or services instead of capital) will be made, when additional capital contributions will be required, and how profits and losses will be shared.

Beyond the basics, a partnership agreement should anticipate major business changes and spell out how to deal with them. For example, if one partner dies, what are the rights and obligations of the other partner/s? Under what circumstances can a partner leave, retire, or be expelled? What are the financial arrangements for departing partners? How long must an ex-partner wait before starting a competing business?

A partnership agreement can’t address every possible contingency, so consider an arbitration clause to handle disputes that you and your partner/s can’t resolve on your own. Without such a clause, your only alternative could be costly litigation.

Your business will run more smoothly with a carefully thought-out, written partnership agreement. See us and your attorney for assistance in getting it done right.