When starting a business with a partner, it can be tempting to just take things a day at a time without any formal agreements. In most cases, this will go quite smoothly for a little while. At some point, however, disagreements or situations will arise that can’t be ignored and create issues in partnerships.
This is when having a partnership agreement in place can save you a lot of trouble. From the very start of a new partnership, an agreement should be put in place. If you’ve already been working together for a while without one, creating a partnership agreement as soon as possible is advisable.
In fact, depending on where you’re doing business and the exact type of company you run, you may need to have one to get going. That being said, even the most casual business partnerships are going to want to have at least some kind of agreement.
Each agreement will be unique, but they should all cover some specific issues. If nothing else, then these issues are all going to be very similar within each document regardless of what other ones are addressed. The following five topics should be addressed, along with any other situations that one or multiple partners are concerned about:
Issues Within Partnership Agreements
Depending on the exact type of work you’re doing, things might differ in a way. However, you’ll want to consider these following issues for sure.
When running a business, there will typically be certain financial obligations that need to be met. This could be up-front capital to buy supplies, to buy real estate, to pay rent on a property, or any number of other things.
When it is necessary to have money added to the business, this part of the agreement will address how it is to be done,who will put up the money, how it will be determined if and when money is needed, how the money will be repaid, and many other questions should be covered in this section of the agreement.
Division Of Work
Running a business is a lot of work, and one of the biggest conflicts that can occur is having one partner taking on a disproportionate amount of the work. By deciding ahead of time who is responsible for what work, conflicts can be avoided.
This part of a business agreement can even lay out steps to take in the event that there is a disagreement on how much work is being done by a partner, or how the work is being done. Keep in mind that you’ll want to explicitly agree on this both legally and morally so that you don’t end up with any kind of problems in the future.
Income (Division of Profits)
The goal of every business is to make money for the owners. Deciding how the profits of a business should be distributed is critical.
Will each partner take a weekly paycheck of the same amount? Does one partner get more? Are the profits (or at least a portion of them) reinvested into growing the business? There are many questions that need to be answered about the division of profits within a partnership agreement.
Death Or Incapacitation Of A Partner
In the event that one of the partners dies or becomes incapacitated, what should happen? While most people would agree that the business would continue to run and help support that partner (or their loved ones), this isn’t always possible.
The business partners should look at the situation objectively and decide what can be done. Will the ownership transfer to the deceased partner’s spouse? Or will it be transferred to the remaining partner(s) with some type of compensation going to the spouse?
Taking the time to think about these issues will help to avoid difficult problems from coming up during an already difficult time. While it’s never a pleasant thing to think about, getting the discussion over with now will eliminate the risk of ever having to discuss it again in the future.
Options For Exiting The Partnership
Whether it is a year down the road or decades, eventually one of the partners is going to want to exit the partnership. This could be for retirement, or just because they are ready to move on to new opportunities. When one partner leaves, it can be devastating to the business if it isn’t handled properly, which is why it is so important to have it covered in the partnership agreement.
Everyone is usually in business to earn a profit so they can support themselves. Thus, it’s important to work out how the distributions of these profits will be established.
You need to decide how much each partner will be paid and who will be paid first. Outline how the profits will get distributed and whether or not each partner will receive some sort of salary or simply share the profits. Depending on the specific type of business you’re running, you’ll also want to work out who will get paid if there’s only enough money to go around for one of the partners.
This is another one of those difficult decisions that are best worked out now so that it doesn’t cause any additional strife at any point in the future should it have to be discussed. Note that distribution agreements that are made need to be decided at the income level beforehand or they might have to be worked out depending on the type of business agreement being discussed.
Eventually, members of the partnership will have some sort of disagreement. That’s almost a foregone conclusion of any company that lasts long enough for this sort of thing to come up. That being said, if you’ve worked out a division of the decision-making power you’ll be able to settle the disagreement or at least make a decision to move forward. You may want to be able to work this out before anything occurs.
Improve Your Partnership Agreements With Trembly Law
Trembly Law is happy to take the time necessary to have an agreement created or updated so that it addresses all necessary situations, and provides excellent protection to the partners as well as the business. We are also here to help you get the answers about any other sort of business questions that you might want to ask.
If you need a partnership agreement written up for your business, or you would like an existing agreement modified, please don’t hesitate to contact the Trembly Law Firm.