Going into business with friends or business associates is exciting, but you want to help ensure that your business will succeed. Before you decide how the business will market itself, you first must set up the business.
When you set up a business as a partnership, rather than as, say, an LLC or corporation, it doesn't mean you can just start it with a handshake. You'll need a partnership agreement before you officially open your doors. Operating without one is a business risk not worth taking.
A Written Partnership Agreement
A partnership agreement is a comprehensive contract between you and your partners. The more detailed it is, the fewer problems you'll have later. Partnerships undergo change, such as by adding partners, handling retirements, or by changing the type of business. The more complete the partnership agreement is, the more protection you and your partners have moving forward.
A good partnership agreement is not adversarial—after all, you're opening a business together with your partners, so you're not trying to trick them, but you want to map out what challenges the partnership could face in the future and how to deal with them.
It's a good idea to have an attorney write or review your partnership agreement. You can't count on your state's laws to protect you if you and your partner decide to part ways later. Each state's laws are different and may not apply to your type of business. A partnership agreement generally prevents your partnership from being subject to state laws because the partnership agreement governs.
Contents of a Partnership Agreement
While there are partnership templates available, knowing what to write is where online resources and attorneys can help. For example, you can't have anything illegal in your agreement, such as an agreement for a medical practice when you're not doctors.
Partnership agreements should contain at least the following:
- The partnership's name. Pick a name that will help your business be found on the internet. Some online companies can help you get on the first page of search engines. They also check your business name to see if it's taken in your state, although your attorney can do that, too.
- Each partner's contribution to the partnership. State what each partner is contributing, and that the contribution percentage equals the percentage of ownership in the partnership. If you want to have equal partners, you may want everyone to contribute the same amount. Clearly describe what percentage of ownership you all have. Refer to a loan if you'll be getting one.
- Each partner's duties. One partner will be better suited for bookkeeping, while another can work with vendors and the public. Divide the duties, such as who is a managing partner, general, or limited partner. Name someone to oversee your marketing efforts unless you're hiring a marketing company.
- Your principal place of business. List the address and any plans for possible growth. If you decide to add another building or to move, specify how you'll agree to that, such as by a unanimous vote.
- How long the partnership will exist. You can limit the amount of time your business will be open. Include how you'll determine whether to get a partnership agreement extension.
- The partnership's purpose. Explain the type of business and what your goals are.
- How you make decisions. List what happens if you have a tied vote and whether someone acts as tiebreaker. Specify who makes major and minor decisions, and explain what they are. For example, daily operations could be considered minor decisions.
- Distribution of profits. Specify if partners are taking a draw or salary, how often, what to keep in the bank, which bank to use, and how distribution works. An accountant or attorney can advise you on the best practices for paying yourselves.
- How to handle debts. Include this in detail, so there's no guessing later.
- How to amend the agreement. Put procedures in place for possible amendments.
- How to add or remove partners. List the procedures necessary for adding or getting rid of partners.
- Each partner's rights and liabilities. Partners are personally liable for debts if the business is not an LLC or corporation, so discuss this with your attorney if you're not sure whether a general partnership or an LLC structure would be best.
- Time off. Specify this, so there are no disagreements. State which days partners will work and when partners can take time off. List your business hours.
- How much insurance to get, what kind, and where to get it. This is an important but sometimes overlooked issue. Include liability, theft, and fire protection.
- How and when to hire vendors and employees. Have this agreed upon at the outset.
- How to buy out other partners. Specify what procedures you need to follow to buy out someone or terminate another partner without dissolving the business.
- Dissolution of partnership. List how and when the partnership gets dissolved, such as upon a partner's retirement, death, or move. List procedures for dissolution so you don't need a separate dissolution agreement. Check with an attorney to see if your state's laws require something specific.
- What state law governs. Usually it's the state where the business is principally located.
- Using arbitration or mediation for disputes. Require amicable dispute resolution before a partner goes to court.
- Additional clauses. These include noncompete and nondisclosure clauses, and whether one partner's actions or contracts can bind the partnership or if all partners must participate.
Not having a partnership agreement is a sure way to have constant disputes among the owners of your business. Having a detailed partnership agreement—before your open your doors or launch your website—is a great way to start your business and help ensure good future relations among the partners.