Although a partnership agreement isn’t legally required, anyone who works with small businesses will tell you that you should definitely make one anyway.
Today, I’ll explain why you need one, what you should include in it, and I’ll even give you a free template to use when drafting your own partnership agreement.
What is a partnership agreement?
When a business has more than one owner, a partnership agreement is a written document that outlines the rules that the business and each of its partners will follow. It defines things like who owns what, who does what, and what happens if things change, like if someone wants to leave the business.
Why do I need a partnership agreement?
Even if you’re married to your business partner or you trust your business partner with your life, there are lots of very good reasons to have a partnership agreement. Remember that people change, businesses grow, and misunderstandings happen, especially if money is involved.
To avoid business-related misunderstandings, work together up front to put your business’ rules in writing. A partnership agreement can help you:
- Avoid disputes,
- Plan for unexpected events like someone leaving the business,
- Define responsibilities,
- Determine how profits and losses will be split,
- Have more control over your business and its potential outcomes, and
- Protect your investment by planning for what will happen when challenges arise.
What should I include in my partnership agreement?
While your type of business and who is involved in your partnership will play a part in what you decide to include in your partnership agreement, there are some basic elements that I recommend including:
- Names and Roles of the Partners: Be clear about who is a true partner in the business as well as each partner’s roles and responsibilities.
- Capital Contributions: List what each partner is contributing to the business at the onset. This can include money, equipment, or other resources.
- Profit and Loss Sharing: Explain in as exact terms as possible how the business’ income will be split and how the business’ debts will be paid. You may determine to split everything 50/50, but you could also explore profit and loss sharing that’s based on the investments or workload of each partner.
- Banking: List any business-related banking and financial accounts you’ll have and whether both partners will have equal access to those accounts.
- Salaries and Draws: Clearly outline how and when each partner will be paid, whether that’s by a salary, by taking money out as needed, or a combination of both.
- Decision Making and Dispute Resolution: Explain whether one partner can make major decisions alone, define what types of decisions can be made by one partner alone (if any), and outline how the partners will come to a decision if there is a disagreement about a business decision that needs to be made.
- Exit Plan: Explain what will happen to the business and its profits or debts if someone wants to leave, sell their share, or dies.
- New Partners: Explain what criteria you’ll have for determining if a new partner should be brought into the business as well as what steps will take place to bring that person aboard and to continue running the business with an additional partner.
- Dissolution: If you need to shut down your business, explain what processes will take place.
Do you have a template I can use to write a partnership agreement?
Yep, I sure do! You can download the template here, but I highly recommend that you have a business attorney look over the agreement before you sign your name to it. You should also consider consulting an accountant to look over any numbers or financial rules that you add to your agreement.
Abridged by Amy
As an accountant who works almost exclusively with small business owners, trust me when I say that a partnership agreement can save you a lot of headaches down the road. Even if you feel like you don’t need one because everything is going smoothly, you trust your partner completely, or you’re just getting started and aren’t sure yet what will be best, taking a little time to put your business’ rules on paper now is a great way to think through how your business partnership will work and to avoid any potential issues in the future.
If you need help figuring out the numbers side of things, that’s what I’m here for! Contact me if you want to work together to make sure your business is set up for financial success.
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