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Best Practices for Business Partnership Agreements

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The Partnership Agreement Will Become the Cornerstone of Your New Enterprise?

 

Starting a new business can be an exciting time, but one of the most important steps in forming a partnership should never be rushed.  The partnership agreement will become the cornerstone of your new enterprise and needs to both define everyone’s roles and responsibilities and make provisions for what happens if things don’t go as planned.

Corporations are governed by their by-laws, but a limited liability corporation (LLC) receives its direction from a partnership agreement. This document should be in place before you begin to do business, and the process of drafting it will compel the future partners to give some serious thought as to how the company will be managed.

Rights

Partners usually make a capital contribution to a start-up, whether it be cash, real estate or other tangible assets. In exchange, they receive ownership rights and a share of the profits, which may or may not be equally divided. It’s important to outline exactly what each partner is putting up, and how the initial capital will be spent. You should also include a contingency plan in the event that the fledgling business requires additional investment before it turns a profit.

Determining exactly how the returns from the partnership will be distributed is critical. Vague clauses and unanswered questions are certain to attract problems once you start making real money. Initially, partners may draw a salary, and amounts need to be defined along with any provisions for subsequent raises. If the intention is to repay the seed capital, you need to specify at what point this can happen. Eventually, you’ll want to make distributions and will have to determine in the partnership agreement how they are to be allocated.

Responsibilities

Discovering that you and your partners have a very different approach to day-to-day tasks and decision making can be an unwelcome surprise. All comprehensive partnership agreements include a detailed account of how the business will be managed and, most importantly, how major decisions will be taken. Some partnerships work on the principle of majority rule while others follow a consensus model. Either way, your approach needs to be laid out in the agreement.

Despite everyone’s best efforts and good intentions, there may well come a time when partners simply can’t agree. Plan for the worst and ensure that your partnership agreement provides a method of dispute resolution. This can include using the services of a third-party mediator or abiding by the decision of an arbitrator.

Death and Dissolution

Nobody likes to think about failure when a new partnership is forming, but things don’t always work out the way you hope they will. Partners may pass away, become incapacitated, or simply want to leave the business. The best time to form an exit strategy is before you need it, not in the midst of a dispute or health crisis. Include clauses in your partnership agreement that provide a strategy for buying out a partner’s interest or assuming their responsibilities in the event that they can no longer continue. Talk about what will happen if the partners can no longer work together, or if the business doesn’t thrive. Preparing for the worst is one of the best ways to ensure it never happens.

Keep Your Partnership Agreement Current

Over time, things will change. You may learn a few hard lessons from events that weren’t even on the horizon when you first drafted your partnership agreement. Your business may have expanded, you may have brought in new partners, or founding partners may have moved on. If you’ve made significant changes to the way your business is managed or have second thoughts about any of the provisions in your original agreement, you can always make adjustments over time. It’s an excellent practice to review your partnership agreement periodically to ensure that it is still an accurate reflection of your LLC.

A proficient business attorney will point out any pertinent clauses you may have missed, and ensure that the document is clear, precise, and meets its purpose. This document is your rule book, and you want to make sure everyone understands how the game is played.

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