A business partnership agreement is a legal document between two or more business partners that spells out the business structure, responsibilities of each partner, capital contribution, partnership property, ownership interest, decision-making conventions, the process for one business partner to sell or leave the company, and how the remaining partner or partners split profits and losses.
A business partnership agreement establishes clear rules for the operation of a business and the roles of each partner. Business partnership agreements are put in place to resolve any disputes that arise, as well as to delineate responsibilities and how profits or losses are allocated. Any business partnership in which two or more people own a stake of the company should create a business partnership agreement, as these legal documents could provide key guidance in more difficult times.
Business partnership agreements are legally binding documents that partners agree to abide by throughout the life of the business at the start of their partnership.
The needs of partnership business agreement:
A business partnership agreement is a necessity because it establishes a set of agreed-upon rules and processes that the owners sign and acknowledge before problems arise. If any challenges or controversies do arise, the business partnership agreement spells out how to address those issues.
What should a business partnership agreement include?
Business partnership agreements are necessarily broad, touching virtually every aspect of a business partnership from start to finish. It is important to include all foreseeable issues that could arise regarding the co-management of the business. According to Whitworth, these are some of those issues:
- Ownership stake: A business partnership agreement clearly spells out who owns what percentage of the business, making each partner’s stake in the company clear.
- Business operations: Business partnership agreements should explain which activities the business will engage in, as well as which activities it will not.
- Decision-making: A business partnership agreement should outline how decisions are made and the responsibility of each partner in the decision-making process. This includes who has financial control of the company and who must approve the addition of new partners. It should also include information on how profits and losses are distributed amongst the partners.
- Liability: If the business partnership is set up as an LLC, the agreement should limit the liability each partner faces. To do so effectively, a partnership agreement should be paired with other documents, such as articles of incorporation. A business partnership agreement alone is likely not enough to fully protect the partners from liability.
- Dispute resolution: Any business partnership agreement should include a dispute resolution process. Even if partners are best friends, siblings or spouses, disagreements are a natural part of doing business together.
- Business dissolution: In the event the partners choose to dissolve the business, a business partnership agreement should outline how that dissolution should occur, as well as continuity or succession planning, should any of the partners divest from the business.
To ensure that your business partnership agreement adequately covers each of these areas, involve your business’s legal counsel in the development and review of the agreement.