By Nicholas J. Laybourn, published on February 23, 2011, in Business in Savannah.
There is much to be said about forging a business partnership. After all, two heads are usually better than one. However, business partnerships can highlight differences in personalities, goals and management styles and increase the chance for partnership disputes.
Entering into a business partnership in 2011? Rule number one: never enter into a business partnership without first securing a comprehensive partnership agreement or contract suitable to both parties. The process of planning for each situation is an enlightening process for partners and fundamental to a lasting partnership. This agreement also helps avoid costly court battles down the road, which could ultimately need to be sorted out by a judge.
Structuring a comprehensive partnership agreement between business owners helps to establish a sort of business “constitution” so to speak. Both parties know up front what they have signed on for, what they are guaranteed and the consequences of certain actions. Important questions such as share of profits or losses, management, individual responsibilities and an exit plan are answered in advance in a partnership agreement.
As there are many areas of preliminary issues to discuss when considering a partnership for a business, such as the business model and name of the business, it is also important to consider the following areas of discussion when developing a partnership agreement.
Differentiating between individual responsibilities, including cash, property and service contributions is critical in advance to avoid contribution disagreements that have plagued many successful businesses for decades. This will also help determine ownership percentages, an essential number to have in a partnership agreement.
Once ownership percentages have been determined, partners can then decided on the allocation of profits, losses and draws. Will profits and losses be allocated in proportion to a partner’s percentage interest in the business? Will each partner be allocated a regular withdrawal of profits or will all profits be distributed at the end of each year? Since each partner may have differing views on the financial matters, decide in advance how each partner will be paid, how often and how much of the profit goes back into the business.
Partnership authority and partnership decision-making are also matters for
discussion. Setting up a decision-making process to determine how decisions will be made for the business helps to keep the flow of business moving and the level of conflict down. You may, for example, want to require a unanimous vote for each business decision. If that becomes tedious, require a unanimous vote for all major decisions and allow individual partners to make minor decisions on their own. In this case, the partnership agreement will also have to describe what constitutes a “major” or “minor” decision.
Questions that cover management duties such as who will keep the books, help with customer service, supervise employee training and monitor inventory should also be addressed. It is also wise to develop a plan for growth in advance as this issue may arise if the business is a success.
As with any good thing, business partnerships tend to come to an end at some point. Be prepared for the inevitable withdrawal of a partner, either by unforeseen circumstances or by a planned retirement. Include rules in your partnership agreement that address the handling of the departure of an owner. A reasonable buyout plan or provision should be included in the partnership agreement.
The goal of a well-written partnership agreement is to include as many of the foreseeable items of conflict that may or may not arise within the course of doing business. An initial investment up front to secure an adequate, legal document that protects the assets and interests of the business and each individual partner will save you in the long-term.
Nicholas Laybourn is an associate at HunterMaclean who specializes in business litigation.