A business partnership is a legal entity consisting of two or more people who merge their experience and resources. Each person owns a percentage of business assets based on his or her initial contribution.
It’s important to choose a business partner whom you trust implicitly. You should trust him or her so much that you would have no problem providing access to your personal bank account. If the person is a close friend, don’t assume that means the two of you would make good business partners. In fact, a poor business experience could destroy your friendship. It’s better to choose a partner based on what he or she can bring to the business, past experience, and leadership style than anything else.
While this business structure offers numerous benefits, it’s not without its challenges. That is normal when two or more people begin working together in such a close capacity. We highly recommend creating a partnership agreement before officially launching the business to reduce conflict and allow for maximum efficiency.
What to Include in a Business Partnership Agreement
We recognize that every business partnership is unique. However, we have found that addressing these issues in a business partnership agreement upfront is beneficial to both parties as well as the future of the business.
- Contributions: This covers both financial and time contributions to the business. How much will each partner invest in the business upfront and for ongoing needs? Who will handle which business needs such as customer service, ordering inventory and supplies, and hiring and managing employees?
- Critical Developments: You can make the most solid business partnership agreement in the world and still have an unexpected or crisis situation arise. The current COVID-19 pandemic is the perfect example. Your agreement should cover such topics as business continuity, what to do if a partner becomes ill or dies, how to respond to a buyout offer, and much more.
- Decision Making: This can grow to a major point of contention between you and your business partner if not defined upfront. Now is the time to determine who makes what decisions and if one partner has the final say, not when you’re locked in heated disagreement later. Be sure to include which business decisions require a unanimous vote by the partners.
- Dispute Resolution: If communication breaks down to the point where you’re unable to resolve conflict with your business partner, how will you handle that? Will it require a business mediator? Would you consider arbitration? Although it’s not pleasant to think about this topic, it’s reality for a lot of business partnerships.
- Dissolution: When it’s not possible to resolve conflict or one partner wants out of the business, having a formal dissolution policy can reduce stress at a difficult time. Keep in mind that each state has a different policy regarding business dissolution that you will need to incorporate into your plan.
- Distributions: How do you and your business partner intend to split the profits? Your agreement should also indicate whether any of the partners receive a salary in addition to sharing profits.
- Ownership: What is each partner’s percentage of ownership? What happens if one partner wants to buy out the other? How does ownership change due to bankruptcy, death of a partner, and other possible scenarios?
Ready to Get Started? Contact Capital Business Strategies Today
Creating a business partnership agreement, not to mention your initial business plan, can feel overwhelming for new entrepreneurs. We invite you to request an appointment to get advice and assistance with this important task.