Why A Partnership Agreement Is Critical For Your Business

When you bring a business partner on board, you’re trusting them with a lot. Your business is a product of your investment, time and effort. Handing over responsibility to someone else means they have to be someone you’re willing to hand some control over to. While having a partner can strengthen the foundation and capabilities of your business, it also means giving up some of the total control you may have been used to if you’ve run your business solo.

Although your fears are legitimate, it doesn’t mean you should reject the concept of a partnership entirely. Instead, you can mitigate some of the fears you might have about bringing a partner aboard by ensuring that you have a robust and detailed partnership agreement in place.

What is a partnership agreement?

A partnership agreement is a contract between two people looking to own a business together. Most partnership agreements essentially outline the terms for all likely scenarios you may encounter doing business together. Basic terms include the ownership percentage and distribution of profits, the length of the partnership (is it limited or indefinite?), the duties and expectations of each partner, how to end a partnership and how one partner can buy out another.

Your agreement should spell out the legal liabilities that each partner has, detail new ways the partnership can change in the future and acknowledge issues such as intellectual property and non-compete agreements that would protect your company secrets should your partner ever leave and work for competition.

You can insert requirements that conflicts be sorted out through mediation or binding arbitration, and you can specify what each partner is allowed to do with “their half” of the company – a thorough agreement will specify, for example, whether or not a partner can sell their part of the business with or without their partner’s consent.

If you want to add new people to the partnership, there should be a provision for that in your agreement. If one partner becomes disabled or otherwise unable to continue his duties, there should be a provision in place to fairly but efficiently remove him from the agreement that is detailed in the partnership.

Above all, a partnership agreement should be what you and your partner consider a reasonable agreement to divide the responsibilities and reap the benefits of running your business.

How to get an agreement in place

If you’re looking to put a partnership in place at your business, you should ensure that any partnership agreement is drafted and reviewed by both parties before committing to anything. Your first version may not necessarily fit your potential partner’s vision of their role in the company, and don’t be completely surprised if you have to negotiate some aspects of the agreement.

Bring a lawyer into the process as soon as possible. Ideally, your attorney should draft a partnership agreement for you based on your state’s laws and your preferences for how to run your business. Yours will help you navigate the difference between a general partner versus a limited partner, developing a legally sound buy-out agreement, and helping you develop a non-compete, non-disclosure or non-solicit agreement depending on what information your partner will have and the nature of your industry.

Although you can construct a basic partnership agreement online through simple forms, depending on the complexity of your business it won’t be enough to anticipate any particularly complex or large-scale financial issues. A lawyer you talk to will have a better understanding of the legal possibilities of your business than you will, so leaving it to an online template might lead you to make rookie mistakes.

A thorough partnership agreement can protect both you and any potential partners in your new endeavor. Take this legal necessity seriously – it will protect you down the road and give you a legal defense for maintaining ownership and direction of your business.

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