If you are considering starting a partnership, knowing what the most important sections of a partnership agreement are, and understanding why they are important, is vital. It will help you both avoid problems down the road and solve them. So, before you start your dream business, read on to learn how to prevent it from turning into a nightmare.
First – What is a Partnership Agreement?
Simply put, a partnership agreement is a legally binding document that states how the owners of a company will operate their business. Additionally, this agreement also shows how business owners should address and resolve disputes between them. In other words, it establishes what the partners can and cannot do, as well as what they must do.
A good partnership agreement is a perfect balance between rights and obligations. Without a comprehensive partnership agreement, even a minor issue can lead to complete chaos.
Although the State of Florida does not legally require you to create a partnership agreement to start a partnership business, not doing so can be the biggest mistake you ever make. No matter how small your business is, having a partnership agreement is necessary.
The Most Important Sections of a Partnership Agreement
Creating a partnership agreement is easy – all you need to do is download a template from the internet, fill it out, and then print it. It would be very difficult to create a good partnership agreement including the provisions needed, the partners and business legal protection, and the structure to help you run your business efficiently and successfully.
However, it can also be unbelievably easy – all you need to do is let an experienced lawyer do it for you.
However, that does not mean that you should not make sure you understand how your agreement works. So, here is a list of the most important sections of a partnership agreement:
In a partnership, sometimes some partners work more hours per week than others. Some partners do not even work; instead, they function as passive partners who contribute only financially. Similarly, some partners choose to provide support and guidance. When you create a partnership, it is vital to have a clear contribution structure all partners agree on.
However, this is not enough. You need to describe this structure in your partnership agreement explicitly. Why? Because if you do not, then each partner will be doing what they promised to do instead of what they are legally obligated to do. There is a big difference between those two things. For example, suppose one partner agrees to contribute to the business in a particular way and then a year later stops contributing.
Since there is no partnership agreement forcing him to fulfill his obligations. There is not much the other partners can do to get that partner to resume contributing to the business.
The Decision-Making Process
Unfortunately, nothing tears friendships and families apart like businesses. Many people starting businesses with their loved ones tend to think no disputes will arise because they know, love, and understand each other. However, thinking so is a big mistake. When the future of a business is at stake, stress levels skyrocket, and so do the odds of a dispute arising.
When you run a business, your job is to make decisions. Some decisions are easy to make. Some decisions are incredibly difficult to make because they involve going beyond points of no return. The decisions that can make or break a business are typically the ones that create the most tension between partners.
Thus, your partnership agreement should establish how decision-making occurs to avoid disputes over business decisions – or, at least, to prevent conflicts from hurting your business.
Dispute Resolution Methods
Business partners disagree – that is practically their job. When you run a business, you need to choose the best route, and often your partners will have a different opinion on the best course. However, that is not a negative thing. On the contrary, different views can lead to great ideas.
When partners have different opinions on something, they work together to figure out a route with which all partners are comfortable. In other words, when handled properly, disagreements lead to creativity, which leads to originality, which is one of the fundamental elements of success in the business world.
Sometimes, however, disputes between business partners can get out of hand and become straight-up wars where partners attack and sabotage each other. These disputes can end up causing much damage to their business. If a dispute arises down the road, you will likely not trust your mind because it will probably be overwhelmed by negative thoughts and emotions.
On the other hand, paper does not have feelings, nor does the law or the English language. These three simple things can be the saviors of your business when combined in a particular manner to produce a bulletproof partnership agreement.
Your partnership agreement should establish how you and your partners must settle all disputes. The best way to address and resolve a dispute is, in most cases, arbitration, which is like a trial but less expensive, less time-consuming, and private. For example, suppose a partnership agreement states that all disputes must be resolved through arbitration. In that case, all disputes will be resolved this way, even if one partner wants to go to court.
During a dispute, you and your partners will probably hate your partnership agreement’s guts; however, your business will love it passionately because it will protect it by preventing you and your partners’ rage from causing irreparable damage to it.