The decision to get into a business partnership with another person is a huge one. Maybe the prospective partner is a family member, a childhood friend or an investor. Whatever your relationship with a potential partner, one of the most important things you need to pay attention to is the partnership agreement.
A partnership agreement is a binding contract that outlines how the business will be operated as well as each party’s roles and entitlements in the partnership. While no two partnership agreements are the same, here are three crucial elements to mention when drafting your partnership agreement.
1. What each partner will bring to the table
Contributions like finances, expertise, time and other resources may vary depending on the purpose and nature of the partnership. For instance, one party might offer start-up capital while the other brings managerial and/or operational skills.
The partnership agreement should outline what each partner is expected to contribute – as well as the implications should they fail to live up to their obligations.
2. Profit and liability allocations
When you go to business, you hope the business will always make profits. The reality, however, is that the business might make a loss. It is important that the partnership agreement outlines how both profits and losses will be shared.
3. Decision-making powers
Each party comes into the partnership with specific interests in mind. For these interests to be realized, however, the partners must have the power to make certain decisions regarding day-to-day operations. These powers should be clearly articulated in the partnership agreement.
A business partnership comes with a ton of benefits. To run an effective partnership, however, it helps to start by having a watertight contract. And knowing what to include in a partnership contract can help ensure that your rights and interests are safeguarded throughout the partnership period.