Compared to forming certain types of business entities, such as a corporation or an LLC, it’s relatively easy to form a partnership. Technically, any time two or more people decide to jointly manage a business and share its profits together, they are creating a partnership. Legally, all they have to do at that point is to file their paperwork with the New York Secretary of State’s office.
And, no doubt there are some partners who don’t need to do much more than that. They may always get along, and always agree about major business decisions. They may always share the work and the profits equally. They may even keep this up for years.
But, for most business owners, even the most harmonious business partnerships don’t last forever. At some point, the partners will disagree about an important business decision. At some point, one partner is going to want to leave, retire or die. The business will need plans to handle these eventualities.
The best way to handle these plans is through a partnership agreement.
What to include in your partnership agreement
Your partnership agreement will be a contract between you and your other partners. You can tailor your agreement to the exact needs of the business and the individuals involved, but there are certain elements that should be included. These include:
- Division of ownership: Do you and the partners intend to have equal shares in the business and share the profits equally, or do you want a different division of ownership? Likewise, will all partners contribute to the business equally? Will they share the profits equally? If not, how will you divide the responsibilities and distribute the profits?
- Disability or death of a partner: How will the business deal with the situation if one partner decides to leave, or if they die or become disabled and unable to continue as partner? The agreement should provide a way to deal with these possibilities by, for example, calling for the immediate negotiation of a new agreement.
- Departure of a partner: The partnership agreement should also provide a process that will come into play if one partner wishes to leave the business or sell their share.
Business partnerships often start out as friendships, and these friendships can be destroyed by a nasty disagreement between business partners. A good partnership agreement may not always save these friendships, but it can keep a lid on these problems, protecting the individuals and the business.