Why You Need a Partnership Agreement!!

“A verbal agreement isn’t worth the paper it’s written on.” – Samuel Goldwyn.

Entering into a business partnership is similar to getting married, in that both parties typically don’t anticipate it ending. This mindset can lead to overlooking the inclusion of an important aspect – “The partnership agreement.” Research shows that up to 70% of business partnerships ultimately fail, and when they do, it’s crucial for the dissolution process to be as smooth as possible to avoid personal and financial complications. The absence of a written agreement between partners can lead to a lack of direction and unforeseen issues, similar to a ship without a rudder.

Partnerships are rife with conflict because everyone considers themselves to be the boss. That’s only one of the many factors that contribute to failed partnerships. With the best of intentions, partnerships are formed. They fall short for several avoidable causes. If partnerships are like marriages, a good partnership agreement will likely serve as a good prenuptial. It provides all partners with a wonderful opportunity to talk about the many types of problems that can develop throughout operation and negotiate a way to resolve such issues before you actually start the firm. And arise they will, for sure, whether you like to hear it or not. It should include (but not be limited to):

• A section on the distribution of profits, outlining how profits will be divided among partners and whether it will be proportional to their investment or split equally.
• A section on taxes, losses, and debts, detailing who is responsible for filing tax forms and the level of liability for each partner.
• A section on the allocation of shares, specifying the level of ownership interest for each partner and whether it is proportional or divided equally.
• A section on the management of the company, including who makes major decisions, handles day-to-day management and bookkeeping, and the level of control for limited partners.
• A section on voting rights, outlining whether partners can vote on major decisions, protections for minority owners, and procedures for breaking ties.
• Clauses on the future of the partnership, including the conditions for termination, selling shares, and transfer in case of illness, incompetence, disengagement, or death of a partner.

When I refer to a “well-drafted and negotiated” partnership agreement, I mean one that is created by experienced attorneys representing each partner, to address areas of potential disagreement and tailor it to the unique expectations and concerns of the parties involved, and also taking into account the specific issues related to your business and industry. It is important to avoid using generic forms purchased from online services, as using these forms without proper negotiation and customization can put the parties in a worse position than not having an agreement at all. So, having a Partnership structure and a proper agreement is so much required to safeguard every partner’s interest and for the longevity of the partnership. Bear it in mind for the longevity of your partnership success. For knowing more about partnership agreements, you can get in touch with Coach AB.