Top 5 considerations when drafting a partnership agreement
One of the most fundamental elements of a new venture is establishing the nature of the relationship between those who are involved, as well as their relationship to the business. This is why a partnership agreement is one of the most important documents in the startup process. Here are five key considerations to bear in mind when you are drafting or reviewing a partnership agreement.
1. Avoid ambiguity. A lack of certainty is one of the main reasons that disputes can arise later down the line so ensuring that every aspect of an agreement is clear – and in writing – sets the business off on the right foot to begin with. A typed, signed, dated document that lays out all the key terms of agreement between the partners is essential if the relationship is to be clear and fruitful.
2. State the capital contributions. To a certain extent the amount of cash that partners put into a business will have significant bearing on their relationship with that business – and to each other. So, it is important to clearly state the capital contributions i.e. how much each partner is investing to get the business off the ground. It’s also a good idea to set out where additional funds will come from in situations where the startup capital isn’t enough, as well as clarifying more complex relationships, for example if one partner is providing most of the funding whilst the other is doing most of the day to day work.
3. Profits. This is a key issue for any business so a solid partnership agreement must cover how profits are to be dealt with. This should include when – and how – the partners can take money out of the business, whether a certain minimum must remain at all times, whether there are to be salaries paid and whether money already invested by one or other partners is to be repaid.
4. Disputes and decision making. When beginning a business relationship most people tend to view that relationship in a positive light, assuming cooperation will come as standard and issues will be worked through. However, the reality is not always like that, which is why it is crucial to include both procedures for dispute resolution, and information on the steps that are to be taken to make decisions – the latter may well prevent the former being necessary. How will decisions be made, particularly where partners don’t agree but a conclusion must still be reached? And if events do lead to a dispute how should this be resolved – include here details of preferred avenues of mediation and alternative dispute resolution.
5. Leaving the partnership. As with any relationship, no one wants to consider the end at the beginning. However, in business this is a necessary practical step. What is the exit strategy if the relationship begins to crumble? Is the partnership to be dissolved or continue with one less partner? Setting the exit strategy out right at the beginning lessens the potential for acrimony and disputes if things do fall apart at the end.
A solid partnership agreement will underpin any business and is a crucial part of a good beginning. Incorporating these considerations will give any partnership agreement a sturdy basis.