Every business needs a good mix of talent and abilities. It's great to find a partner whose skills complement yours, but be sure to put your partnership agreement down in writing. As in all relationships, transparency is critical.
Whichever business format you choose for your start-up, if you have partners, it's advisable to establish a legal entity as soon as possible to give the business a separate identity and protect the individuals from personal liability.
Think of it as a type of prenuptial agreement. If the relationship goes awry, solid agreements will cover all the issues that may arise.
Pros and Cons of a Business Partnership
So why should you choose a partnership? Here are a few things to keep in mind:
- A business partnership is easy to form and doesn’t require lengthy legal documentation
- Partners share start-up costs
- Partnerships usually have an easier time attracting funding opportunities than sole proprietors
- There is an increase in available skills and knowledge
- A business partnership tends to lighten the workload and pressure
- If one of the partners die the partnership will need to be reformed before business can continue
- Since decision making is shared, you won’t have total control of the business
- Conflict between business partners can happen, which is bad for business
- If one partner partakes in any legal activity you will both be liable
Before you decide to form a partnership, decide whether you are the type of individual who works well with others and doesn’t mind making joint decisions on everything. Also, give some proper thought to who you would want to partner with.
Partners need to share the same vision for the business and be able to work well together. It’s advisable to think twice about partnering with a close friend since starting a business is a difficult process and your friendship might not survive the journey.
Find out more about how to avoid common business partnership problems here.
A guide to developing a partnership agreement
This BizConnect guide will help you draw up a business partnership agreement that includes the essential clauses that will protect you and your partners throughout the life of the business.
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- What is the name of the partnership?
- When was it formed?
- What is the nature and purpose of the business?
Authority, roles, and responsibilities of the partners
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- What is each business partner's initial contribution to the business and percentage ownership? This may include cash, intellectual property, machinery, vehicles and other items.
- What is each partner's role?
- What are each partner's responsibilities within the company?
- What level of performance is expected?
- What will each partner contribute in cash, loans and investments?
Profit and loss distribution and financial management
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Each business partner's "distribution percentage" - reflecting their share of partnership profits and losses - must be clearly stated in the agreement.
- What will the income of each partner be, and how will profits or losses be distributed?
- What banking arrangements will be made for the partnership?
- Which partners will have financial signing privileges?
- Who will be authorised to draw on the partnership's accounts?
- How will the books be kept?
Governance and disputes
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Partners have disagreements. Include in your partnership agreement how those disagreements will be worked out. Determine who is going to manage the partnership, who will be eligible to sign contracts, and whether partners are going to be receiving salaries.
You also need to determine the voting rights of the partners. Many partnership agreements require that the partners be unanimous in agreement when deciding to admit new partners, merge with another company or sell part of their business.
- On what grounds can a partner be expelled from the partnership (misconduct, non-performance of duties)?
- What methods will be used to settle disputes that can't otherwise be resolved?
- What procedures should be used in the event of a tie vote between partners on crucial partnership decisions?
- Will you use mediation or binding arbitration?
Exit rights and buyout obligations
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The most important thing to spell out in a partnership agreement is what would happen if things don't go as planned and you want to exit the partnership. The agreement must spell out how to dissolve the partnership - the circumstances under which partners can withdraw, how much notice they must provide, and how the assets will be distributed.
It should clearly state who gets what when the partnership dissolves, and spell out rules for what the partners can and cannot do afterwards in terms of restraints of trade.
- What guidelines should be followed if one partner wants to leave the partnership?
- Will partners be allowed to sell their interests in the business to outsiders?
- What guidelines should be followed if one partner wants to retire or leave the partnership?
- What happens if a partner is incapacitated or dies?
- When can the partnership be dissolved?
- What happens to the partnership if the partners decide they can't work together?
- What methods will be used to determine the value of the business in the event of a sale, dissolution, death, disability or withdrawal of a partner?
By including this information in the business partnership agreement, you will have a written document that spells out the structure and understanding of the partnership, as well as the underlying sense of fairness in the relationship established by the partners when they set up the business. This will make it far simpler to work through any number of issues that may arise.
Assistance with business partnership agreements
If you would prefer to not create the partnership agreement yourself then you can contact a lawyer for help with the entire process. Sites such as Attorneys and Find an Attorney allow you to search for a lawyer in your area.
To ensure that your partnership agreement is ticking all of the right boxes, use this helpful checklist.