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Copyright 2009-
A Partnership Agreement is Necessary When Starting a Business
Starting a business with a partner can be a great option. Each of you can bring different resources to the table, improving the company's overall chances to succeed. You have someone to bounce ideas off of and to discuss alternatives with. You are sharing the risk, and potentially the reward with someone you respect enough to join forces with. But the honeymoon period doesn't usually last forever and the realities of struggling through a startup will reveal themselves soon enough. Talking through the optimistic, success potential of a business idea is easy, but partners need to cover the negative possibilities and the rest of the details up front as well.
Discussing the details can be uncomfortable for business partners. Often, they have dissimilar personalities and communication styles (an advantage in most other areas of the partnership), and thinking about what could go wrong is rarely a fun conversation. However, by working through these issues before you launch, you not only save yourself from possible serious conflict later, but you may also discover some obstacles and threats to avoid over the life of the venture.
Putting together a comprehensive partnership agreement is a necessity before you get started on the new business. Each party needs to be clear on their own roles and responsibilities within the organization, as well as their share of the payoffs. The right answer to every issue depends entirely on the particular situation of your partnership. It is important that both parties be open and honest in their opinions and perspectives, and that each be willing to listen to the other's arguments. Honestly, if you have trouble getting through a simple partnership agreement, that's a huge red flag for the future of your working relationship!
Some of the topics that absolutely should be covered within the partnership agreement include:
Roles
Each partner should be responsible for separate roles within the business. Just saying, "Oh, one of us will handle the accounting" is a bad idea...one person should be the final accountable individual for every critical task within the business. Obviously, taking on the roles that each has the most experience with makes sense, but there are likely to be some areas in which neither are particularly skilled. In these cases, someone needs to step up and learn the basics, even if you ultimately agree to outsource the specific task.
Balance of Power
Often, new partners assume that they will be able to operate everything by consensus
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It is better if there is one partner with the power to make certain decisions. One
way to handle this is to categorize decisions by role, such that whoever is responsible
for that role also has final say on related issues. And, you can add a provision
that limits the expenditure amount of single-
Profit Distribution and Other Pay
With an LLC, the profits can be distributed in any proportion, regardless of the
ownership interests reflected in the organization paperwork. Be sure BOTH parties
are comfortable with the decision. And, consider other pay options, such as putting
one or both on salary for their day-
Exit Strategies
Eventually, one or the other of the partners is likely to want (or need) to get out of the business. Discuss the options for exiting the business, how the ownership shares will be paid off, whether selling to an outsider will require approval and the like. Your partnership agreement should include both ways for a partner to leave voluntarily and for removing a partner involuntarily. Finally, include a provision that describes what happens in the event of the death of a partner. This discussion is absolutely necessary, because when it's time to go your separate ways, you will be eternally grateful that you have already agreed to the basic terms.
It is very common for new partnerships to be concerned about what is "fair" to each member. Unfortunately, there are no right answers, the best agreement for you depends on what you and your partners work out. However, it is essential to get this done as early in the life of the business as possible. Be open, be honest, and hammer out an agreement that makes you both comfortable.
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