Partnership can be a rewarding and efficient business model if set up the right way. If your partnership is not set up in the right way, it can disrupt your life for months, years, or more.
The key to a successful partnership is getting the support to craft a robust partnership agreement from day one.
This agreement serves as a framework that ensures all partners are on the same page, which leaves less room for disputes and more room to grow the business.
While I’ve provided six essential clauses that every partnership agreement must include, here’s a little secret: it’s less about the agreement itself and more about the process of getting to the agreement.
In a future article, I’ll share more about the agreement process, and how to work with your advisor to ensure the agreement process itself protects the future success of your business.
01 | Decision-Making Protocol
Establish a clear decision-making protocol. Do decisions need to be made using a consensus or a majority vote? What happens if there is a tie or a consensus can’t be reached? Laying out the policy for how decisions for the company are made will help avoid issues and conflicts in the future.
02 | Capital Contribution Documentation
Ensure meticulous documentation of each partner's capital contributions, specifying who contributed what and when. Plan for a scenario in which capital runs out and address whether partners will infuse additional capital, seek external funding, or contemplate closing the business. Proactive consideration of these scenarios now can possibly stop a financial crisis later.
03 | Salaries and Distributions
Define the parameters for partners to withdraw money from the business. Address questions about the reimbursement of initial investments and explore scenarios where a partner might want to reinvest profits for an extended period. This clarity fosters financial stability and minimizes potential conflicts.
04 | Dispute Resolution
It's prudent to include a well-defined dispute resolution mechanism in your partnership agreement. Whether through mediation, arbitration, or another agreed-upon process, having a predetermined way to address disputes helps partners find amicable resolutions without resorting to costly and time-consuming legal battles. This approach also fosters a collaborative environment, ensuring that challenges are navigated smoothly, and the business continues to thrive even in moments of contention.
05 | Death and Disability Contingencies
Discussing what happens in the event of death or disability may be uncomfortable, but it’s important to go over what will happen to a partner’s shares if he or she dies or becomes disabled and can no longer contribute to the business. Having this information in a legal agreement will help you create individual estate plans that address your business holdings. Unfortunately, we see many partnership agreements that overlook this altogether. Make sure yours doesn’t, and call us for support, if it does.
06 | Dissolution Plan
Facing the eventual departure of a partner can be a delicate subject, but establishing a clear dissolution plan at the outset is essential. Agreeing on the exit strategy in advance prevents confusion and potential disputes during the business relationship's conclusion.
Setting The Foundation for Business Success
Making sure your partnership operates in the best and most cooperative way possible requires strategic planning. By incorporating these vital clauses into your partnership agreement, you can proactively address potential challenges before they even happen.
If you want to make sure your business avoids the common legal pitfalls that partnerships often encounter, start the process by consulting with us, your LIFTed Business Advisor®. We'll help establish a comprehensive Legal, Insurance, Financial, and Tax system for your business, allowing you to concentrate on its growth with confidence.
Click here to schedule a complimentary call with our office to learn more.
Like what you're learning?
Level up your legal knowledge by signing up to our free newsletter
Notes from the Chief Counsel's Desk
and get more legal insights and actionable legal advice sent directly to your inbox.
Want to go over your project or situation at length?
We'll answer any questions you may have and ultimately help you decide what's right for you.
We love talking about the details of your project and giving you an idea of what's possible. We'll walk you through every step of the process, from planning to designing your plan to help you achieve your goals.
Start your business right with a Legal Strategic Planning Session.
This session will give you the opportunity to discuss with counsel a particular legal issue and perform a review of legal, insurance, finance & tax systems to ensure a solid foundation for growth.
Get the confidence you need to accelerate your business’s growth!
Discover your business’s blind spots!
The Session is designed to help us understand where your business is now, where you want it to go in the future and the gaps in between that are holding you back from getting there.
We’ll guide you throughout the process and provide you with a LIFT Foundation Audit™ that reviews your business' legal, insurance, finance and tax foundations. By the end of the Session, you'll know exactly what needs to be done to fill any holes we discover so that your time, energy and money stop leaking out.
This article is a service of Sky Unlimited Legal Advisory PC, Personal Family Lawyer® . We're not your traditional law firm, we stand apart from the rest by helping you make informed and empowered decisions on how to deal with your business throughout life and in the event of an emergency. We offer a complete spectrum of legal services, including a New Business Planning Session or an Existing Business Review Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. You can begin by calling our office at (650) 761-0992 today or book online to schedule a Business Planning Session and mention this article to find out how to get this $950 session at no charge.
Having a will simply is not enough. It doesn't guarantee the care of your children if the unthinkable happens! See how we do it differently...
The strategies that are appropriate for protecting your assets are different for every family. Check out our proven process that gives you peace of mind...
Our unique legacy process gives your loved ones a precious gift - a lasting expression of your love. Find out what we offer with every plan...