What are the component of a partnership agreement?
Partnership agreements are contracts between the partners which controls how the partnership is managed, how profits and losses are distributed, and how partnership interests are acquired or transferred. While each partnership endeavor is different, there are some common essential elements any partnerships agreement should include.
1) Ownership
What percentage of the company does each partner own? Are you going into this business 50/50 or is one partner investing more from the start? You need to define the official ownership split and rights in your agreement.
2) Authority
How much authority does each partner have to make decisions for your business? Do you want each person to have to sign off on every decision, or do you want to give each other freedom to make smaller decisions? It is important to define those decisions that are small decisions and a part of everyday operations, and those decisions that are large decisions that require the input of all partners.
3) Contribution
What is each partner going to contribute to the business? Your agreement should address this in detail, including not only what each partner brings in as startup costs but also any equipment or other materials that each partner brings into the business. Your agreement should include an inventory of items that each partner brings into the venture, with a description of how ownership will be determined in the event that the partner leaves the business.
4) Workload
Every partner may not work full time with your company. You need to establish exactly how much work each partner is going to do on a day to day basis. This is where you will decide the type of hours each partner works, things like how many sick days or vacation days they can take, and whether a partner can conduct business on other outside interests.
5) Compensation
Your agreement needs to define how much each partner will be paid for their efforts. How will you distribute the profits and losses of your company? This will also correlate with other aspects of your agreement, such as the percentages of ownership and the workload of each partner.
6) Dispute Resolution
You may not believe it will ever happen, but it is a very realistic possibility that you and your partner will have a dispute at some point or another. Your agreement should define how you plan to solve disputes and what action should be taken if you cannot come to an agreement or compromise.
7) Death
What happens if one of the partners dies? If this is not explicitly defined by your agreement, you could be facing miles of legal red tape with regard to how that partner’s interests in the company are handled during the administration of his or her estate.
It should be noted that while these items are important elements, this list isn’t all-encompassing, and due to the technical nature of many of the items listed, it’s wise to consult a business law specialist when drafting your partnership agreement. Because these agreements are designed to protect you and your stake in the business, it’s vital they contain the necessary details.
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