- Elon Musk, Investor & Entrepreneur
Business partnership agreements legally outline all of the details of an agreement between two or more parties. These documents can limit liability between partners. Everyone in a business partnership agreement benefits from having one.
The closest of friends and even spouses benefit from these documents. Having a plan in place before conflicts arise can save a business. If everyone sticks to the agreement, many headaches can be avoided. Use a business partnership agreement to set up every new venture for success.
WHAT IS A BUSINESS PARTNERSHIP AGREEMENT?
A business partnership agreement is a legally binding document that establishes the responsibilities and expectations of business partners within an entity. These agreements explicitly state all of the terms within the partnership. A business partnership agreement outlines clauses for profit sharing, divestment, decision making, and more. These documents provide a solid foundation for working relationships.
When two or more parties begin a working relationship, things are often agreeable. As challenges arise, the relationship could become tense. These agreements set out a clear blueprint of what is expected and how to move forward through sticking points. A business partnership agreement spells out what everyone’s role is.
WHO NEEDS A BUSINESS PARTNERSHIP AGREEMENT
Anyone entering into a business endeavor with one or more other people needs a business partnership agreement. These contracts protect all parties involved. There is no reason not to draft one for any new venture. Everyone benefits from clear expectations.
It can be tempting to avoid formality when entering a business with a friend or family member. Even amongst partners, a business partnership agreement is vital. No one enters business expecting it to fail. These documents protect you in case things dissolve.
Business partnership agreements protect parties involved in many types of working relationships. Joint investors can ensure no one is left holding the bag. Spouses can make a plan in case of a future divorce. The business world is volatile, and these agreements can be a safe harbor.
WHAT SHOULD BE COVERED?
It’s important to know what to include in a business partnership agreement. Failing to include important details could leave one or more parties open to liability. Make sure your agreement covers every aspect of your business. Some common points to include are:
- Business Operations: the document should very clearly define which activities the business will engage in and explicitly state which it will not. Leave no room for interpretation.
- Ownership Stake: Make each partner’s stake clear and define who owns what percent of each asset.
- Dispute Resolution: Define your dispute resolution process well in advance. Disagreements are part of every relationship. You’ll want to be prepared before emotions are high.
- Decision Making: Clearly define your decision-making process and the role each party plays in that process.
- Business Dissolution: Outline plans for continuity and succession if one or more partners choose to step down from the business.
- Liability: This is where these agreements really shine. In conjunction with other documents such as articles of incorporation, this document can limit the liability of both partners.
Be sure there are no covers of your business left uncovered. A business partnership agreement should be thorough. Carefully creating this document ensures no snags in the future. It’s worth it to take your time.
HOW IS ONE IMPLEMENTED?
Businesses grow and evolve constantly. Your business partnership agreement can be revised as needs dictate. Think of it as a living document that changes with your business. Be sure to frequently revisit your agreement to endure. It still serves the needs of the business.
There are steps that need to be taken to implement a business partnership agreement. It’s important to complete each one carefully. You want to be sure your agreement serves everyone’s best interests. The steps to implement a business partnership agreement are:
- Initial Partnership: This occurs when parties initially enter into a business agreement. This is when the business partnership agreement is drafted to outline managerial responsibilities, liability, ownership stakes, operations, decision making, and more. A business partnership agreement should be drafted as soon as a working relationship begins.
- Addition of Limited Partners: Businesses may choose to include limited stake partners who have less ownership and power but also have less at risk. These partners can be valuable members of the team, even in a limited capacity.
- Addition of Full Partners: Full partners can be added with equal investment, risk, and power as well. Full partners can provide valuable investment but also change the power dynamic.
- Continuity and Succession: A plan should be made for when the original partners decided to leave the business. Redistribution of responsibilities and ownership stakes must be outlined. This is especially helpful for spouses involved in business together. They can decide what happens to their business in case of a future divorce or death.
With careful planning, you can write a business partnership agreement that covers all of your bases. Knowing what to cover is essential. Leave no weak spots or vulnerabilities within your agreement. This document is meant to protect all parties involved, but it’s only as airtight as you make it.
RESOURCES TO WRITE YOUR OWN
You can easily write up your own business partnership agreement document. There are many free resources available such as templates and legal information, to make the process easier. Begin with a reference document or free template and carefully customize it to your business. A drafted agreement isn’t set in stone and can be negotiated.
Once you’ve drafted up a business partnership agreement, you’ll want to make sure you’ve covered all of your bases. Hiring legal counsel to look over your work is a good practice. This ensures you’re not leaving yourself open to future issues. Any business lawyer can easily review an agreement for a fee.
Know your business and what role each party plays in it. Make sure to explicitly outline every aspect of your working relationship. Draft up a business partnership agreement at the onset of every new venture. Make sure you protect yourself from any future roadblocks.
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Thought leaders & celebrities share their tactics for success on the Lisnic podcast by Lisa Teh & Nick Bell