Understanding Partnership Agreements

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3 minute read

Partnership Agreements: Key Elements You Need To Know

While society loves the idea of self-made men and women, the truth is that most people achieve the greatest amount of success through strategic partnerships. However, many make the mistake of entering into these collaborations without the proper legal paperwork to protect them.

If you are teaming up with someone else in a business venture, you must have a legally binding partnership agreement in place, and there are 8 key elements that contract needs to have.

Contribution of Capital

When you form a partnership, each person should be bringing capital to the table. However, this might not always be 50-50. Your partnership agreement should outline the capital each partner is contributing to the joint venture.

Percentage of Ownership

In many cases, the percentage of ownership will align with the amount of capital contributed, but not always. For example, one partner may not have a lot of cash to contribute but plans on doing the vast majority of the work. As a result, they could still get 50 percent ownership without contributing nearly as much in capital.

Allocation of Profits and Losses

Unless you indicate otherwise in the partnership agreement, profits and losses will be allocated based on the percentage of ownership. If you want this divided up differently, be certain it is noted. Also part of allocation is the question of being allowed to take draws—an advance on payment of profits similar to a paycheck but without taxes withheld.

Restrictions on Binding the Partnership

Unless otherwise stated in the contract, any partner can bind the partnership without consent from other partners. This means they can sign legally binding contracts that involve your business without you so much as knowing about it. Not restricting binding puts you at significant risk.

The Decision-Making Process

If the goal is for all partners to always come to an agreement on business matters, you may never get any business done. This is why the decision-making process must be outlined in the contract. Include fail-safes for when there are stalemates to ensure that your company is always able to move forward.

Buy/Sell Agreement

Whether due to a partner wishing to leave the business or one of the parties passing away, a buy/sell agreement is critical. This should establish the method that will value partnership interest as well as the interest purchased by the partnership collective or individual partners.

Mediation Clause

If there is a dispute within your partnership, you risk heading to court. While this might solve the issue, it tends to be time-consuming and costly. A mediation clause can prevent this by outlining a procedure to be used when resolving conflicts, hopefully keeping them out of the courtroom.

Length of Partnership

When you enter a partnership, you might not have an end date in mind. However, there are situations where businesses are meant to dissolve once a certain date or milestone is reached. If this is what you have in mind, make certain it is clarified in the partnership agreement.

Should you need assistance with drafting or enforcing a partnership agreement, turn to ContractsCounsel.com. We offer guidance from vetted attorneys that help you stay protected and within your budget.

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