A business partnership can be quite complex depending on the number of parties involved and the nature of the partnership. To address these complexities, it is important that the parties involved create a watertight partnership agreement.
A partnership agreement is a binding document that outlines how the business will be run and the roles and rights of each partner. While partnership agreements differ depending on the business goals and objectives, certain clauses are almost automatically necessary.
Here are important questions you need to ask before putting pen to paper on any partnership agreement.
How will ownership be divided?
A valid partnership must clearly spell out what each partner is bringing on to the table. These can be in the forms of cash contributions, equipment, services or expertise. Ideally, each partner’s contribution should play a role in determining the percentage they will own in the business. It is important that each partner’s contribution and stake are clearly indicated in the agreement.
How will profits and losses be shared?
Businesses are formed to make profits. Sometimes, however, they may make losses. It is important that the partners agree and document how they will share profits and losses. Most often, profits and losses are shared based on the percentage of each partner’s contribution in the partnership. A clear profit and loss sharing mechanism can go a long way in mitigating potential conflicts down the road.
How long will the partnership last?
While some business partnerships are meant to last a lifetime, others are meant to serve a specific purpose, for a specific timeframe. A good partnership agreement should specify how long the business partnership is expected to last. It should also indicate what will happen at the end of the partnership period.
To serve its purpose, it is important that the partnership agreement includes clauses that offer adequate protection for everyone involved.