When you go into business with a good friend or relative, it can be tempting to believe that you don’t really need to have a formal partnership agreement. But partnership agreements aren’t designed to cause disputes. They’re designed to prevent them. When an agreement is in writing, everyone can easily stay on the same page.
Here are some of the things that every partnership agreement should include:
Percentage of ownership
Who owns what? Who contributed what to the business before it was started? It’s wise to document these things from the beginning so that there’s no question later.
Profits and losses
How do you plan to allocate the company’s profits and losses? Typically, they’re divvied up based on ownership interest — but that’s not always the case.
No matter how much you agree with your partner right now, there will come a time when you can’t agree on something important. One of you has to have the final say to keep things moving. Look at your respective roles and divide up the power accordingly.
What happens if you get divorced? What happens if your partner marries? What if one of you dies? Your agreement needs to spell out what happens to the agreement and your business from there.
If there’s a major disruption in your working relationship and you end up squaring off against your partner in a dispute, what rules do you want to govern the process? Aim for a balance that protects both your personal interests and that of the company.
Find out more about what it takes to make an effective partnership agreement so that you can go into negotiations with your business partner prepared.