A business partnership agreement is a legally binding document that outlines the roles and responsibilities of two individuals or entities acting as business partners. A business partnership agreement can also be known as a partnership contract or articles of partnership.
Below are 8 things to include in a business partnership agreement to ensure that everyone is adequately protected and your business is set up right from the start.
1. Name and Location of the Partnership
Your partnership agreement, which is sometimes also known as your articles of partnership, should include the name of your partnership and the location it operates from. This ensures no confusion over which business is referred to in the document.
2. Member Contributions
Usually, when creating limited partnerships, each partner or member of the company will make a financial contribution or investment in the business. These investments should be listed in the operating agreement so that if there is any question about who contributed what, it’s all there in black and white.
3. Allocation of Profits and Losses Between Business Partners
A business partnership agreement will also include a section that explains how profits and losses are allocated to the various entities acting as business partners, so there’s never any confusion about who gets what.
Most partners will expect to see regular financials from their accounting team. If things are going well, profits will increase, and everyone will make more money. If they’re down, it’s time to tighten belts and focus on increasing sales.
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4. Decision-Making Power and Authority Structure
Business is about making money. To do that, you need effective business management. Therefore, your partnership agreement should outline the roles and responsibilities of the partners, as well as their decision-making rights and responsibilities.
Usually, all of the business partners included in the agreement will have some involvement in running the business, but not always. Therefore, the partnership agreement should also be spelled out if particular partners are not involved in business operations.
5. Withdraw, Termination, or Death of Partner
Sole proprietorships have a simple business structure because only one person runs the company. However, adding more people to the business gets more complicated.
This is why your articles of the partnership will also include information about what will happen if a partner or partner dies, is disabled, or wants to exit the partnership. It’s always better to have this detailed long before it becomes possible.
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6. New Partner Addition
People leave partnerships from time to time, but new partners also join them after they are created. For example, at some point, another partner might want to join your company and take an ownership stake.
Your partnership contract and LLC operating agreement should outline how and when you can add new partners, their roles and responsibilities, and what kind of a share they may take in the company.
7. Civil Dispute Processes
It happens as much as we don’t want to think we’ll ever argue with our business partners.
This is why partnership contracts include a section detailing the company's civil dispute process.
Usually, this will include processes such as:
- Mediation
- Arbitration
- Court action
This section will detail when each one will be used and may also include an internal process like voting that may be used to settle less serious disputes.
8. Signatures of Business Partners
Any legally binding contract must be signed and dated, and your partnership agreement is no different. It should include the signatures of all business partners, as well as where the agreement was signed and who witnessed the agreement.
Suppose there are any last-minute amendments to the partnership agreement document. In that case, all parties should initial the change to become part of the contract.
Get Help Drafting a Business Partnership Agreement
Many people don’t like the idea of a partnership agreement. We like to think that we trust the people we’re going into business with and can rely on them. Unfortunately, that’s not always the case; even the closest business partners occasionally have legal disputes.
A partnership agreement and articles of incorporation are designed to protect everyone involved and ensure that all of the terms and conditions of the business partnership are clear and easy to follow. It’s a document you hope you will never need to refer to, but you’ll be glad you have it when you do.
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