Going into business with a partner is a lot like getting married. You will go into it enthusiastically and optimistic that your business will be a total success and will last forever.
However, there could come a time when you and your partner do not agree on how to move forward with the business or maybe there is some other dispute that you cannot come to terms on. This is where a partnership agreement comes in.
As part of starting a business with a partner, you should always take the time to work out a partnership agreement to cover everything from profit distribution to dispute settlement options. Before you take the next step in forming your new business, include these items in the partnership agreement.
Contributions
When you begin a partnership, each owner will typically make a contribution to the business in the form of cash or property. This will create each owner’s beginning basis in the company. The specifics of the opening contributions should be stated in the partnership agreement along with each partner’s duties and responsibilities owed to the business.
Distributions
Unlike an S-corporation, the owners of a partnership do not receive salaries. Instead, they receive distributions and guaranteed payments as specified by the partnership agreement.
For example, if your partner is performing a specialized service for the business in addition to functioning as a managing partner, he or she might receive guaranteed monthly payments in addition to an appropriate share of the company profits. In the partnership agreement, be sure to include the details of how and when the company will make distributions to the partners.
Dispute resolution
Another important section to include in a partnership agreement is one that addresses dispute resolution. Maybe you are going into business with your best friend or a relative and you can’t imagine any circumstances where the two of you would disagree.
However, there will probably come a time during the duration of the company where you do not see eye to eye. A dispute resolution clause will outline the process the partners should follow to resolve any issues. For example, the partnership agreement might specify that you start with mediation before pursuing a court judgment.
If you are forming a business as a partnership, it is vital to create a partnership agreement. This is a road map to follow when it comes to the issues above as well as dissolving the business, making major decisions that affect the company and how to handle critical developments. A strong partnership agreement can help avoid a legal fight in the future if there is a falling out with a partner.