10 key provisions to include in your partnership agreement
This post is not legal advice and is for general informational purposes only. Always speak with a lawyer before acting on any of the information contained herein.
If you are looking to start a new business with partners, then you will need to implement a partnership agreement. A partnership agreement is a contract that provides a framework for what each partner is contributing to the business, how they share in the profits and losses, and how the business is managed.
Your partnership agreement is a roadmap for your business so it should be clear, accurate, and thorough. Here are the top 10 provision's we'll cover today:
1. Percentage ownership
When people come together to do business they will generally want to have an equal stake in the partnership. However, in some businesses, the partners may each have different percentage ownership in the partnership. The partnership agreement should reflect this fact by specifying the names of the partners and their ownership percentages. Without this provision, each partner is assumed to have an equal share of the business.
Partners can contribute either money, property, knowledge, or a mix thereof. The partnership agreement should explain what each partner brings to the business from the very beginning, as well as what each partner is responsible for in the future. This includes contributions made in the form of time, effort, and equipment.
Each partner’s goal is to make the business succeed. So, it’s understood that each partner has the right to make decisions and to enter into agreements on behalf of the partnership. If however, this is not the case, your partnership agreement needs to specify who is allowed to make decisions for your business. This creates a framework for the types of decisions being made, how they are made, and how they are documented so everyone stays on the same page.
4. How finances will be managed
An important discussion that’s often overlooked is the finances. It’s vital to lay out how the finances of the business will be handled, including the frequency with which the business will provide financial statements. Additionally, lay out how the books will be kept and who will be responsible for them.
5. Distribution of profits/losses
Business success is often tied to profitability so your partnership agreement should state when and how the profits will be distributed between the partners. In the same manner, the agreement should also explain how losses will be distributed among partners.
6. Non-disclosure, Non-compete, and Non-solicitation clauses
The non-disclosure, non-compete, and non-solicitation clauses will protect the business in various ways. Each of these clauses will function together to:
Keep your business secrets confidential (the non-disclosure clause);
Prevent partners from taking everything they learned from building the business and starting on their own (the non-competition clause); and
Prevent a partner that leaves the business from soliciting your employees or your clients (the non-solicitation clause)
7. New partners
There may come a point in your partnership where you decide to add new partners to the mix. A forward-thinking partnership agreement will specify the framework to add a new partner. Even if you're unsure, it's important to prepare for every eventuality so as not to be left without any guidance.
8. Withdrawal (or death) of a partner
It’s uncomfortable having to discuss the potential scenario where a partner leaves the partnership, but it’s a reality that needs to be addressed. Partnerships break down all the time, for various reasons. Irrespective of why, procedures for departure should be put in writing, and should include provisions regarding buy-outs, and changes in responsibilities that may arise due to the inability/death/withdrawal of one partner.
9. Resolving disputes
Conflicts happen and can be handled more effectively with a dispute resolution process already agreed to and in place. Such issues can give rise to deadlocks and potentially even lawsuits. To prevent this, establish a framework at the outset when everyone is reasonable and getting along. This can include mandatory mediation and/or arbitration instead of filing lawsuits. Waiting until a problem arises and tensions are high before discussing how to resolve it will likely result in your partners refusing to participate in mediation or arbitration.
10. Policy on conflicts of interest
Oftentimes, the parties that form partnerships also have other business interests. Stress the importance of avoiding conflicts of interest. These include a partner competing with the partnership for their account or on behalf of a third party, and withholding property, knowledge, or activity that the partner is required to contribute. An internal policy of conflicts of interest should define and provide examples of conflicts of interests, and a framework for handling those that arise.
It’s vital to include these 10 provisions in your partnership agreement so you can start with a strong foundation. Visit our partnership agreement page to learn more or contact us if you are ready to get started.