A partnership can be a rewarding and efficient business model if set up the right way. Planning a partnership is vital - if your partnership is not set up in the right way, it can disrupt your life for months, years, or more. The key to a successful partnership is getting the support to craft a robust partnership agreement from day one.
This partnership agreement serves as a framework that ensures all partners are on the same page, which leaves less room for disputes and more room to grow the business.
While I've provided six essential clauses that every partnership agreement must include, here's a little secret: it's less about the agreement itself and more about the process of getting to the agreement. In a future article, I'll share more about the agreement process, and how to work with your advisor to ensure the agreement process itself protects the future success of your business.
01 | Decision-Making Protocol
Establish a clear decision-making protocol. Do decisions need to be made using a consensus or a majority vote? What happens if there is a tie or a consensus can't be reached? Laying out the policy for how decisions for the company are made will help avoid issues and conflicts in the future.
02 | Capital Contribution Documentation
Ensure meticulous documentation of each partner's capital contributions, specifying who contributed what and when. Plan for a scenario in which capital runs out and address whether partners will infuse additional capital, seek external funding, or contemplate closing the business. Proactive consideration of these scenarios now can stop a possible financial crisis later.
03 | Salaries and Distributions
Define the parameters for partners to withdraw money from the business. Address questions about the reimbursement of initial investments and explore scenarios where a partner might want to reinvest profits for an extended period. This clarity fosters financial stability and minimizes potential conflicts.
04 | Dispute Resolution
It's prudent to include a well-defined dispute resolution mechanism in your partnership agreement. Whether through mediation, arbitration, or another agreed-upon process, having a predetermined way to address disputes helps partners find amicable resolutions without resorting to costly and time-consuming legal battles. This approach also fosters a collaborative environment, ensuring that challenges are navigated smoothly, and the business continues to thrive even in moments of contention.
05 | Death and Disability Contingencies
Discussing what happens in the event of death or disability may be uncomfortable, but it's important to go over what will happen to a partner's shares if he or she dies or becomes disabled and can no longer contribute to the business. Having this information in a legal agreement will help you create individual estate plans that address your business holdings. Unfortunately, we see many partnership agreements that overlook this altogether. Make sure yours doesn't, and call us for support, if it does.
06 | Dissolution Plan
Facing the eventual departure of a partner can be a delicate subject, but establishing a clear dissolution plan at the outset is essential. Agreeing on the exit strategy in advance prevents confusion and potential disputes during the business relationship's conclusion.
Setting The Foundation for Business Success
Making sure your partnership operates in the best and most cooperative way possible requires strategic planning. By incorporating these vital clauses into your partnership agreement, you can proactively address potential challenges before they even happen.
If you want to make sure your business avoids the common legal pitfalls that partnerships often encounter, start the process by consulting with us, your LIFTed Business Advisor®. We'll help establish a comprehensive Legal, Insurance, Financial, and Tax system for your business, allowing you to concentrate on its growth with confidence.
If you want to know more about drafting a partnership agreement that will cover all of the essential clauses, we invite you to reach out and schedule a complimentary discovery call with us.