4 Issues to Address in a Partnership Agreement

Deciding to go into business with another person is exciting. In some ways, this decision is similar to the decision to get married. However, before you and your new business partner start working, you need to create a partnership agreement. Think of this as a sort of prenuptial agreement – a legal document to explain exactly what each person is bringing to the partnership and what each person expects from the other. Here are four issues you’ll want to address in your partnership agreement.

1.  Roles

In your partnership agreement, you want to specifically define your roles. For example, if you plan to work on creating the product while your partner works on sales, say so. Take the time to be specific about what each person plans to bring to their role. This way, if there are any disagreements in the future about what each person is supposed to be doing, you can refer back to your partnership agreement.

Another benefit to defining your roles is that it can help you better understand what other employees you and your partner need to hire. To continue with our analogy above, if you are in charge of product creation and your partner is in charge of sales, you might want to hire someone to do your accounting, to purchase materials, and to manage your employees.

2.  Initial investments

Before everything gets co-mingled, take the time to decide on and document your initial investments. Make sure to add approximate valuations for any physical items. This way, you can keep track of what each person brings into the business before it begins. Often, your initial contributions will impact how you and your partner will divide profits and expenses.

3.  Profits and expenses

No partnership agreement is complete without a decision about how profits and expenses will be divided amongst the partners. Although this part may sound really straightforward, there are several related decisions to make.

For example, you will also need to decide whether, how and when you and your partner will get paid salaries.

Making these decisions now will ensure that there is no confusion later about when you’ll each get compensated and what that compensation will be based on.

4.  The tough questions

It might be unpleasant, but you and your partner need to ask yourselves the tough questions. How do you make a decision if you disagree with each other? What happens if one of you wants to quit? What happens if one of you dies or gets sick?

Basically, you and your partner should take some time to ask the toughest, worst-case-scenario questions you can think of. Make sure your answers to these questions are recorded as part of your partnership agreement. Then, if any of those situations should arise in the future, you will know just what to do.

Do You Want to Make the Best Partnership Agreement?

If you want help creating your partnership agreement, Cove Law can help. Our business law experts are here to answer any questions you might have and help you and your partner create the most thorough partnership agreement possible. To find out what we can do for you, give us a call today at (954) 921-1121 or contact us online.

Written by Andrew Cove

Cove Law has significant experience defending federal investigations and formal actions by the Federal Trade Commission, the Consumer Finance Protection Board and the U.S. Department of Justice, as well as similar matters on the state level by the respective state Attorney General’s Offices and other local agencies.