Your partnership agreement is a legal document that outlines each partner’s rights and responsibilities as well as the operating procedures for the business. When a group of people come together to invest in a business venture, the partnership agreement can provide valuable protections. But drafting an agreement that provides you with the protections you need can be tricky. Including ironclad clauses that offer comprehensive protection is a good place to start.
Here are five clauses every partnership agreement should have:
Decide now how you will make decisions down the road when there is no consensus. Having a protocol in place for managing disagreement will help you move forward even when consensus is not possible.
2. Capital Contribution
Make sure each capital contribution is documented clearly. Be sure everyone knows who put in what and when. Also, decide what will happen if that capital runs out. Will you contribute more capital, turn to other sources of funding, or close your doors? Don’t wait until you’ve run out of capital or are facing a financial downturn to consider this piece.
3. Salaries and Distributions
Address when and how the partners will be able to take money out of the business. Will you each be repaid for your initial investment? What happens if one partner wants to expand their investment and keep money in the business longer?
4. Death and Disability
This isn’t easy to talk about, but it is important to go over what will happen to a partner’s shares if he or she dies or becomes disabled and can no longer contribute to the business. Having this information in a legal agreement will help you create individual estate plans that address your business holdings. Unfortunately, we see many partnership agreements that overlook this altogether. Make sure yours doesn’t, and call us for support, if it does.
Again, this can be a sensitive topic to broach, but it is very important to decide what will happen when a partner wants to leave the business. Better to determine the protocol at the beginning of the business relationship than at the end. Agree on your exit strategy now.
Partnerships can present unique problems, but with sound planning, you can overcome them. If you want to avoid the costly legal mistakes partnerships often make, begin by sitting down with a Family Business Lawyer™. Your Family Business Lawyer™ can establish a sound legal, insurance, financial, and tax system for your business so you can focus on growth.