Starting any kind of business venture is an exciting (and somewhat daunting) endeavor. Launching a small business on your own poses its own set of challenges, while deciding to establish a business partnership opens up a different range of opportunities and considerations. However, it’s important to recognize that while the idea of going into business with a partner, family member, or close friend may initially sound exciting, challenges will arise that can upset your dynamic and create conflict. As you approach your business partnership, it helps to plan for the complexities that the future may hold so that you and your partner are well prepared to navigate them with ease, poise, and confidence when they arise.
Drafting a clear and effective partnership agreement provides your business with the solid and secure foundation it needs to enjoy a successful future. You can use this document to minimize any issues that may jeopardize your business journey, planning for any number of challenges that can crop up in the near or distant future. While it’s possible to use generic templates to create a partnership agreement, these forms are typically too vague to offer your business the strong protections it deserves. Instead, it’s worth enlisting the guidance of a knowledgeable and experienced business law attorney who can help you avoid common partnership agreement mistakes and ensure that your new venture is sufficiently protected. Let’s take a closer look at how to draft a partnership agreement that aligns with your specific vision for your business.
Does My Business Need a Partnership Agreement?
First, it’s helpful to understand what a partnership agreement is and the scenarios in which it can be useful to small business. According to the U.S. Chamber of Commerce, “Partnership agreements are a protective measure to ensure that disagreements can be resolved quickly and fairly. It also helps guide what actions should be taken if the partners wish to dissolve the working relationship or business.” In other words, a partnership agreement serves as a road map for running your business, and you can refer to it for guidance when an issue or dispute arises. Generally speaking, partnership agreements are designed to support business partners who plan on running their enterprise together, specifying the roles and responsibilities of each partner to ensure that the business operates smoothly.
What to Include in a Partnership Agreement
Although some new businesses use online forms to draft a partnership agreement, these tools are better used as guides as you create a customized partnership agreement that is specifically tailored to address your unique business needs and goals. Overly generic partnership agreements typically fail to hold up in the event of a dispute, increasing the risk of a costly legal battle over poorly worded contracts and vague terms. Instead, you can enlist the guidance of a highly experienced and trusted business formation lawyer to help you articulate your vision and draft a personalized partnership agreement that sufficiently protects and nurtures these goals. Below are just a few of the topics you should consider including in your partnership agreement.
Partner Contributions and Percentage of Ownership
As you form your business partnership, you should keep a written record of the specific contributions you and your partner intend to make to the business. Using this information, you can negotiate the ownership percentage of each partner. While many partners initially may wish to form a fifty-fifty partnership, this requires a significant amount of trust. It’s best to review the advantages and challenges of 50/50 business partnerships with your experienced business formation attorney so that you can plan for dispute resolution procedures and other issues that may arise when the partners cannot reach an agreement on their own.
Dividing Profits and Losses
Another important element to address in a partnership agreement is how to handle and divide the venture’s profits, losses, and draws. For instance, you may clarify that the profits and losses will be shared according to each partner’s percentage of ownership, or you can specify that these be divided equally between you (regardless of your percentage of ownership).
Succession Planning
Although the death or incapacity of a partner may seem unlikely during the business formation process, it’s essential to include succession plans as part of your partnership agreement. You will want to have a clear plan in place in the event that one partner passes away or leaves the business. The more detailed your plan is, the easier it will be to navigate these difficult transitions when the time comes. You can work with your knowledgeable business law attorney to adapt your partnership agreement to suit your unique situation and vision for the future, addressing additional topics like the valuation process for the business and beneficiary designations for further guidance and clarity.
Give Your Business the Strong Foundation it Deserves
It’s understandable for new business owners to want to rush through the paperwork and logistics of setting up the business in order to start operating as soon as possible. Unfortunately, moving too quickly through these critical steps can lead to significant legal issues later on, putting your business and your livelihood at risk. Instead, it’s best to partner with a trusted and dedicated business formation attorney who understands how to set your business up for a secure and successful future. Together, you can articulate your goals for running and growing your business so that you can create strong and clear partnership agreements and business contracts that move you toward these goals. Taking the time early on to set your business up for a bright future often ends up saving you considerable time and money in the long run, as you are less likely to find yourself embroiled in costly litigation due to a poorly worded contract or other oversight. Now’s the time to protect your business and feel confident in its strength and longevity—get started with a knowledgeable and friendly legal professional today.
Whenever a question about starting or running a business arises, Judex Law, LLC, is here to help you evaluate your options and identify the most strategic path forward. Reach out to our Broomfield, Colorado office today at (303) 523-4022 to get started with a highly experienced and friendly business law attorney.