The Advantages of a Well-Drafted Partnership Agreement

When going into business, it is essential that you have a partnership agreement in place. Whether joining a friend, business associate, loved one, or an investor, there is always a need to define numerous aspects and tenets of your partnership in contract form, no matter how much you trust the other individual(s).

A partnership agreement is a written contract between two or more parties who would like to come together and work as partners in a business venture.

The partnership agreement is a vital document for each and every business organization with more than one owner. Some of the many benefits of a partnership agreement include:

Clarifies Roles

When starting the company, it is easy to get caught up in managing the various aspects of your new business and forget to actually describe the role that each partner will actually serve in the business. A partnership agreement will clearly define the roles that each partner will play in that entity.

Each partner’s role and responsibilities are explicitly defined, which will help minimize the risk of disputes and misunderstandings that can arise when partners have differing expectations about how the company will operate and their own place within the new company.  The best time to clarify the day-to-day roles and major decision-making responsibilities is when the business is new and relationships are good.

Minimize and Resolve Financial Disputes

When running a business with other people, money is oftentimes a major source of contention. The agreement will clearly outline details about the amount contributed by each partner and what that number entitles them to in the business.

Profit distribution is also defined, indicating the percentage of both profits and liabilities incurred by the company that each partner will be entitled to.

In the partnership agreement, you may also detail more practical matters such as who gets access to the company bank accounts and how each partner may utilize company credit.

New Partners

At some point in the future one of the partners may want to bring in someone new. A partnership agreement will come in handy in such cases as it will detail the specific circumstances under which a new partner may join the business and the procedure to be used in allowing or denying the addition to the ownership.

Decision Making

When it comes to running a partnership, simple decision-making can become extraordinarily complex if there are no rules or procedures regarding how you and your partners will approach disagreements. Your partnership agreement will allow you to define the procedure whereby you make decisions both big and small that will impact your company. When there are disputes or disagreements over certain decisions, your partnership agreement may dictate required forms of dispute resolution, such as mediation or arbitration. This can help you avoid the escalation of small disagreements into large scale disputes and also streamline your leadership’s decision-making capabilities.

Death and Incapacity

Should the worst occur, and a partner is either killed or severely injured to the point of incapacitation, your partnership agreement will define what will happen to that partner’s share of the business. You will have to decide things such as whether the remaining partners will simply buy out the partner’s share, or perhaps you will allow that partner’s spouse or children to take control of that share.

Partnership Dissolution

There may come a time when one or more partners no longer wishes to remain in the business. The partnership agreement will provide an exit plan for such a person(s) and also provide guidelines for expelling a partner from the company when the relationship has become troublesome or destructive. Your agreement may dictate that the company should be dissolved if any partner wishes to end the venture, or it may provide for an individual partner’s exit while the company continues to operate.

If you are starting a new business or operating an existing business with more than one owner, it is vital that you establish a well-crafted and detailed partnership agreement as soon as possible. Contact APH Law today and we will help you draft an agreement that suits your unique circumstances, needs, and business goals.

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Written by APH Law PLLC

APH Law PLLC

When we founded APH Law PLLC in 2010, we did so out of a desire to connect business owners with more and better opportunities. No matter what industry you’re operating in, creating a strong foundation, preparing for the future, and protecting against challenges are key to long-term success. It is this kind of support that we take tremendous pride in helping businesses.