Starting a new business can be one of the most exciting and challenging endeavors of your life. It is a chance to be your own boss, create something meaningful, and contribute to the community. However, it’s important to enter into such an endeavor with ample preparation, and that includes having a solid partnership agreement in place. While it's easy to get caught up in the excitement of a new business, creating a robust partnership agreement is an essential step in ensuring that all co-owners are on the same page and that the business can operate smoothly. In this blog, we discuss what you should include in a written agreement before starting or joining a business as a partner.
Define Ownership Shares: One of the critical components of a partnership agreement is defining what percentage of the business each partner owns. Each partner should agree on how much ownership each person has in the company. This is not always a monetary value; it can also include sweat equity, which is the non-monetary effort and work a partner contributes to the business. Ownership percentage is crucial when it comes to decisions about how much each partner contributes to the business, either financially or through sweat equity. It is a good idea to define the percentage of ownership shares clearly in the partnership agreement.
Roles and Responsibilities: This section outlines the tasks of each partner and the areas they plan to take responsibility for. Remember that contribution to the company isn't only about financial investment, but also includes the time and effort each partner puts into building the business. This sweat equity can sometimes be more valuable than a cash injection. Clarify who will be responsible for finances, marketing, operations, or any other function of the business. Having a clear agreement on roles and duties can help minimize disputes or issues down the line.
Capital Contributions and Profits and Losses: Co-owners should come in with initial capital contributions to the business. This could be in the form of money, assets, or sweat equity. Agreeing on the amounts and understanding how the partnership will distribute profits and losses is imperative. Each partner's share of profit or loss can depend on the share of ownership stake, or the work put in during the start-up phase. The terms of profits and loss-sharing should be clearly spelled out to prevent disagreements.
Decision-Making Authority: Each partner should know what decisions require their input or consent and what decisions can be made unilaterally. It is a good idea to have clarity on how decisions are made, who gets to decide, and what process is set up to make decisions. This is important to prevent misunderstandings or disagreements when difficult or high-impact decisions need to be made.
Exit Clause: A clear exit clause outlines what happens in the event that a partner wants to leave the business. It should also outline how disputes will be resolved in the event of a deadlock, giving the partners a clear process for resolving issues without going to court. A well-defined exit process can help make a clean break- in the case of a partner deciding to leave the business.
Partnership agreements are critical legal documents that provide a roadmap for the smooth operation of a business. The better defined and communicated these agreements are, the better the chances of success for all the parties involved. From defining ownership shares, roles, and responsibilities, to outlining decision-making authority and having an exit clause—having these agreements in place is essential in preventing disputes and establishing a cohesive team. By including sweat equity as a form of contribution, recognizing the immense value of time and work invested into the business, you can ensure your partnership and agreements are above board and give your new venture the best possible chance of success.
Disclaimer: The information contained within this blog is solely intended for informational purposes and should not be regarded as legal advice. While we strive to provide insights and general guidance on the topics discussed, it is crucial to understand that these details do not substitute for legal counsel. To ensure that you receive advice suitable for your unique circumstances, please consult a licensed attorney.