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Critical issues to address in a partnership agreement

On Behalf of | Sep 27, 2023 | Business Law

Entering a partnership can be exciting, as it involves combining shared visions and complementary skills to drive a business forward. But as with any relationship, it’s crucial to set clear expectations and guidelines from the outset. This is where a well-drafted partnership agreement comes into play.

A partnership agreement defines the business’s operation, detailing each partner’s rights, responsibilities and roles. It helps prevent misunderstandings and provides a reference point for resolving disputes. While it’s tempting to rely on verbal agreements, especially among friends or longtime colleagues, putting everything in writing is essential for the long-term health of a partnership.

Defining the roles and responsibilities of each partner

It’s essential to detail who’s responsible for what in the partnership. This can cover financial contributions, day-to-day management tasks and specific business functions. By defining these roles, you can prevent overlaps and ensure that no critical task falls through the cracks.

Determining how profits and losses are shared

While you might assume profits and losses are split 50-50 in a two-person partnership, that’s not always the case. The agreement should spell out how these will be divided based on factors like capital contribution, workload or other criteria agreed upon by the partners.

Setting out decision-making processes

Decisions can range from day-to-day operational choices to major strategic moves. The agreement should detail how decisions are made, whether by unanimous agreement, majority vote or other methods. It’s also helpful to specify which decisions require mutual consent and which can be made individually.

Handling disputes and resolutions

Even the best partnerships can face disagreements. Your agreement should include a dispute resolution process through mediation, arbitration or another method. By setting this up in advance, you’re better equipped to handle issues reasonably and minimize disruption to the business.

Establishing a process for adding or removing partners

Eventually, partners may wish to leave the business, or new ones might be added. The agreement should detail how this process works, from how the departing partner’s share is handled to how new partners are integrated into the business.

Being proactive and thorough when drafting a partnership agreement can save a lot of headaches down the road, as it can lay a solid foundation for a productive and harmonious business relationship. Seeking legal guidance when drafting an agreement can help to better ensure that everyone’s interests are appropriately protected as well.