Creating a Business Partnership Agreement

Grands and funding are two ways a small business can get the money they need. These options might work for you, whether your business is just starting out or established and growing.          

If you plan to go into business with a business partner, a written partnership agreement is important. You will face conflicts and understandings if you and your partners do not spell out your rights and responsibilities in a written business partnership agreement. In addition, without a written agreement saying otherwise, your state’s law will control many aspects of your business.

How a partnership agreement helps your business

A partnership agreement allows you to structure your relationship with your partners in a way that suits your business. You and your partners can establish the shares of profits or losses that each partner will take, the responsibilities of each partner, and what will happen to the business if a partner leaves.

Uniform partnership act

Every state has its own laws governing partnerships (except Louisiana) which are called the “Uniform Partnership Act” or the “Revised Uniform Partnership Act”—or, sometimes, the “UPA” or the “Revised UPA.” These statutes establish the basic legal rules that apply to partnerships and will control many aspects of your partnership’s life unless you set different rules in a written partnership agreement.

Do not be tempted to leave the terms of your partnership up to these state laws. It is better than you put your agreement into a document that sets out the points you and your partner have agreed on.

What to include in your partnerships agreement

You and your partners should consider these issues before you the terms in writing. Here is a list of some ideas that most partnership agreements cover.

  • Partnership name. you must agree on the name of your partnership. You can use your last names or adopt a fictitious business name. Be sure to check t hat your name is not already in use.
  • Contributions to the partnership. you and your partner need to work out and record who is going to contribute cash, property or services to the business before it opens as well as what percentage each partner will have.
  • Allocation of profits, losses, and draws. Will profits and losses be allocated in proportion to a partner’s percentage interest in the business? And will each partner be entitled to a regular draw (a withdrawal of allocated profits from the business) or will all profits be distributed at the end of each year?
  • Partners’ authority. Any partner can bind the partnership without the consent of the other partner if there is no agreement. Make it clear in your partnership agreement if you want one or all of the partners to obtain the others’ consent before binding the partnership.
  • Partnership decision-making. You might want to require a unanimous vote of all the partners for every business decision. Your partnership agreement needs to describe what constitutes a major or minor decision. You should think through issues like this when setting up the decision-making process for your business.
  • Management duties. Some details to consider are who will keep the books? Who will deal with customers? Negotiate with suppliers? Think through the management needs of your partnership and make sure that everything is covered so you know who will be in charge of what.
  • Admitting new partners. At one point, you might want to expand the business and bring new partners in. Agreeing on a procedure for admitting new partners will make your lives a lot easier when this issue comes up.
  • Withdrawal or death of a partner. At least as important as the rules for admitting new partners to the business are the rules for handling the departure of an owner. You should therefore set up a reasonable buyout scheme in your partnership agreement to deal with this eventuality.
  • Resolving disputes. Your partnership agreement should provide an alternative dispute resolution such as mediation or arbitration.

The Bottom Line

There are many issues to consider before you and your partner start your business and you should not wait for a conflict to arise before hammering out some rules and procedures.