When people enter into the business partnerships, they rarely think about how things might go wrong. At the initial stages, most people are more concerned with launching the operations than considering daily issues that are common in a partnership business.
No matter how you choose to go about your business operations, it is still important to create a business partnership agreement between you and everybody involved in the business. It is an essential document for any form of partnership.
Regardless of your sector or goals, the following are key components that must be included in a business partnership agreement to make it legally binding –
Percentage of Ownership
One of the essential things that a business partnership agreement covers is the number of shares that each partner owns in the company. Most of the time, this depends on the amount contributed by an individual partner in the business, which is supposed to be recorded.
Also, a partner may contribute more than money- they can contribute other valuable things such as intellectual properties or tools and equipment. Additionally, this can include factors that like labor, effort, or work that a partner performs to allow the business to run smoothly.
How to Split Profits and Losses?
Another key factor that is covered in the partnership agreement is how to divide profits and losses. By default, sharing of profits and losses depends on the individual partner’s percentage of ownership.
However, suppose you decide to have a separate arrangement, for example, an equal split without following the percentage of ownership. In that case, you have to include the clause in the partnership agreement.
You will also want the agreement to include whether the partners can take advance payments or draws. These are payments of profits provided to a partner regularly without withholding charges.
Length of The Partnership
While it is common for businesses to operate for an indefinite amount of time, there are some cases where they are designed to end or dissolve after attaining a particular milestone or number of years. In this regard, a partnership agreement should show this information, even when the timelines are not clearly defined.
Also referred to as binding powers, the authority should be included and clearly defined in the agreement. Unless it is outlined otherwise, both partners have the binding authority, which is the ability to commit the business to a debt or other contractual commitments.
Doing this might expose the business to financial or legal liability should one partner make a wrong decision. Therefore, it is important to limit this authority to partners who do not demonstrate strong judgment and decision-making skills.
Decision-Making and Disputes Resolutions
One of the common causes of conflicts in a partnership is the challenges involved with decision-making and disputes among partners. In the partnership agreement, guidelines are put in place to govern how decisions are made, which may include voting and other methods that encourage transparency among partners.
Additionally, the agreement should also outline conflict resolution procedures among partners. Usually, this is achieved by including a mediation clause to help solve disputes without going to court.
Withdrawal or Death
The rules covering a departure of a partner because of death or withdrawal from the partnership must be noted in the agreement. These terms may vary widely but usually include a buy and sell agreement showing a valuation procedure or a requirement that each partner maintains a life insurance policy with the others as beneficiaries.
In case you want to get into a partnership and you need help making the agreement legally binding, don’t hesitate to download a partnership agreement template online from this website.