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What does a good partnership agreement contain?

On Behalf of | Jan 26, 2023 | Business And Corporate Law

Taking on a business partner will significantly reduce the risk involved in your new business venture. Your partner can help cover the costs of starting a new business and can bring their connections and experience to your organization.

Instead of needing to handle every detail yourself, you can split your responsibilities with someone who has their own skill set and resources. Partnerships can turn into very successful business ventures when properly organized.

Your initial partnership agreement will play a major role in the long-term success of your business endeavor. What terms should you include in your partnership agreement to improve your chances of successful cooperation?

Specific responsibilities and expectations

The two of you need to agree on what each of you would provide to the organization and what responsibilities you have to one another. From clear expectations for financial investments to discussions of each person’s job functions, your partnership agreement should carefully outline how you will share the responsibility of growing this business together.

Compensation and profit-sharing rules

How will you divide the proceeds if you sell the company later? How much will each of you earn as your base pay, and what kind of profit sharing will you receive when the business becomes successful? You need to address financial matters, including benefits and pay, very clearly in your partnership agreement so that there are not disputes about income and profits later.

Buyouts and dissolution terms

It is always a smart decision to address the end of a business relationship at the beginning. Talking about what will happen to the organization when one of you wants to exit or how you could buy the other out can be important. So can setting certain benchmarks for bringing on more investors or selling the organization to an outside company.

Dispute resolution terms

Inevitably, the two of you may disagree about what is next for your company or how to handle a major challenge. You need to have a system in place to navigate that conflict so it doesn’t do damage to your relationship with one another or to your ability to continue running the organization successfully.

Good partnership agreements clarify your relationship, protect against conflict and address future needs. Drafting a properly protective partnership agreement will help set you up for success with your new business venture.