How to write a legal partnership contract for your small business
Since partnerships require no legal contracts to run a business it is a good idea to prepare a written partnership agreement. This agreement is important because it outlines what is acceptable and not acceptable for the company and if problems arise that can not be solved the written agreement can be used to help solve the problem.
Here are some basics that should be included when writing a partnership agreement.
- Nature and purpose of the partnership - This ensures that the partners will not deviate from the main purpose of the business.
- Capital contributions of each partner - By including how much capital each partner has contributed in writing makes it impossible for others to dispute what others have put into the company. This should not be just limited to money contributions but should include all non-cash contributions as well.
- Profit and loss allocation - Most partnerships split the profits and losses equally but this is not always true. This should be put in writing so if discrepancies ever arise there is proof about who gets how much.
- Authority of each partner - This should discuss each partner's duties, how the duties will be divided up, and how decisions will be made. Basically it will say who has what authority and how far that authority goes.
- How to admit new partners - Most new partners should be added done on a voting basis and everybody should agree. But if you want to have it done by majority rather than unanimous it should be put here in writing.
- A course of action if a partner dies - Most partnerships end if one of the partners die, but this does not have to be the case. For example you can choose to let the dead partner's heir or next of kin take over their share of the business or anything else. Whatever process you want to allow needs to be put into writing.
- How to buy out a partner's share - This part should have when it will be allowed to buy out a partner's share. For example illegal activities, death, divorce, moving out of state, etc. You will also need to include how the buy out will take place, will the partner get a lump sum, will they be paid over a certain number of months or years, etc.
- Signature authority on partnership bank accounts - Here you can allow each partner to sign on behalf of the entire partnership or you can require that every partner must sign the checks.
- Conflict resolution - No matter the business or how well planned out things are arguments can arise that can not be solved. Rather than using legal action you can try mediation or binding arbitration, which ever method you prefer should be writing here for legal purposes.
- What happens when you need additional capital - Here you should discuss if there is going to be a cap on the amount of capital that partners can contribute. You should also include how your company is going to go about obtaining additional capital such as banks, family, etc.
- Can the partners give the company loans - If you are going to allow individual partners to loan money for extra capital you are going to need to determine the terms of repayment and if interest will be paid on the loans, etc.
Just because these are the basics that need to be included in a written partnership agreement does not mean you can not include anything else. You can add whatever you and your partner thinks is relevant to the business and how it should be ran into this agreement.