How Should Business Partners Draft a Partnership Agreement?

Business

A business partnership refers to a legal relationship between two or more parties. It’s a written agreement that outlines the terms and conditions of the relationship among the partners. 

Business partners could be individuals or companies, typically investing money and benefiting from the profits. But moreover, they bear any possible losses in the business too. 

A business partnership agreement must adhere to the business law of the specific state. 

Generally, business partnership agreements are drafted under the supervision of a business law lawyer. These agreements ensure smooth business operations and remove discrepancies during the agreement tenure. Moreover, partners decide how to deal with things that happen in the future. For instance, what happens if a partner disagrees, becomes disabled, or dies? 

Having a business agreement prevents business partners from conflicts that may arise due to unforeseen situations in the future. 

Steps to Draft a Partnership Agreement 

While drafting a business partnership agreement, you first confirm your business partners. Next, gather all the details, such as contacts, percentage of ownership, and the type of partnership. Once you have done that, here are some simple steps to help you draft a quality partnership agreement.

Identify Goals 

Goal setting is the first step. Typically, most business law lawyers recommend setting clear and attainable goals to avoid conflicts and disruptions in the future. Consulting a business law lawyer will help as they may reveal hidden details, mainly scenarios in which goal identification becomes crucial.  

While setting goals, make sure that you identify the various roles that each partner must play. For instance, think about how different partners can ensure business growth. What are the partners looking for when they think of growth?

When you have a clear goal and objective setting, it’s easier to keep everyone on the same page, making it much easier to achieve business goals.  

Consider Taxation 

Even with multiple business partners, the tax applies to each business partner individually.Therefore, partners need to report their income taxes in a distributed form. 

Make sure that it’s clearly mentioned how you’re planning to report income taxes while drafting the agreement, otherwise, it can create confusions that could lead to potential partnership terminations. 

Decide on Contributions

Talk about how much contribution every partner will make to the business. Typically, the contribution comes from cash, services, and property. Some investors with deeper contacts in the industry use their influence to communicate their new business and bring new clients.

Hence, by mentioning the clear contributions of every partner, you can easily decide on the percentage they would retrieve from the business profits. 

Decide How to Split Profit and Losses

Just like figuring out the contribution amount, it’s best to mention the percentage of profit and losses each person receives. You can discuss ownership percentages and profit in cash, stocks, and company shares. 

This way, every partner knows what to expect when the business returns profits. 

Develop a Dispute Resolution Process 

Disagreements and disputes are a part of any business partnership agreement. Therefore, it’s always on the cards that a partner might not agree on the operations or finances of a business at some stage in the future.

This is where ethics and business join hands in resolving possible conflicts before they even arise. You can discuss the resolution process and mechanism to ensure that a change of opinion doesn’t prove fatal to your business partnership. 

Finalize the Draft

Once you have the essential details ready, it’s time to draft the business partnership agreement. Typically, hiring a small business law firm is best to ensure that your agreement is aligned with the legal institutions. 

Generally, business law lawyers provide critical feedback to business partners, helping them draft the perfect business partnership agreement.

Essential Clauses in the Agreement 

The essential clauses to include in a business partnership agreement include the following:

Initial Capital Contributions

This clause provides a clear picture of your business investors. It’s a crucial clause because every partner receives a percentage of profit or loss based on their initial investment. Therefore, having a clause that clearly defines the initial capital contributions can help prevent future disagreements.

Management Structure

The management structure refers to the hierarchical setup of your business. Business partners must mention the type of a hierarchy and how they plan to distribute resources for different departments. 

For instance, you can talk about specific departments that might be included in the business setup. Moreover, if you ask a business lawyer, they will tell you the value of a management structure to evade possible clashes in the future. 

Typically, a management structure focuses on the authority, rights, communications, and roles of different departments and managers.

Allocation of Profits and Losses

Mentioning the percentage and owners of profit and loss in a business makes it easier to handle financial matters without disagreements or banter. Therefore, it’s a must-include clause for a business partnership agreement. 

Benefits of Partnership Agreements 

Some of the major benefits of business partnership agreements include the following:

Clear Definition of Roles and Responsibilities 

A partnership agreement clearly outlines the roles and duties of every partner,so, there is no conflict of interest, and each partner works to ensure their duty is fulfilled. It also keeps you and your partners from any confusion and fights. And it’s easier to figure out the person at fault when things don’t go well.

Facilitate Communication

Business partnership agreements make your communication more clear and effective. Everyone has a clear idea of their roles and expected outcomes. Moreover, an agreement provides a focal point of communication and serves as a reference document for future business plans and meetings. 

Outline Decision-making Structure 

Often, having multiple business partners leads to complications with decision-making. Each partner has different interests, so their motivations could be quite versatile.

However, you can bypass the clash of conflicts by establishing a pre-approved decision-making structure. As a result, business partners have better confidence in their partners and workers, ensuring long-term success for both employees and business owners. 

Conclusion

A business partnership agreement makes it clearer and easier to understand the partnership roles and possible outcomes of a business. Hence, writing down a business partnership agreement can be pivotal for your business success and long-term productivity for which you can take the help of a business law attorney.