The day-to-day aspects of business operations can involve lots of moving parts and the potential for partnerships. The way a business partnership functions can vary depending on a variety of factors. Because of this, every partnership should have a formal partnership agreement in place to ensure all possible scenarios that could affect the business are formalized.
What is a partnership agreement?
A partnership agreement is a legal document that both sets out the terms and conditions agreed to by those involved and dictates how the business is run. Many clauses should be included within the agreement, including those designed to ensure any conflict that could arise can be easily resolved. The following items should always be included in a business partnership agreement:
Percentage of ownership
In each partnership, the partners commit to their contribution to the business. While some partners may agree to invest capital in the business as a contribution to help cover costs, others may prefer to assist with equipment and services offerings. These different contributions can dictate the percentage of ownership for each partner.
Division of profits
The division of profits in a partnership agreement dictates how business profits and losses will be allocated among the partners. Partners can agree to share in profits and losses in accordance with their ownership percentage or the division can be allocated to each partner equally. These terms should be detailed as clearly as possible in order to avoid potential conflicts throughout the life of the business and duration of the partnership.
Contrary to popular belief, not all business partnerships run for an indefinite amount of time. Though this practice is common, there are still instances where a business will be designed to dissolve after reaching a specific milestone or after a specified number of years. The agreement should clearly state this information.
Withdrawal or death
When a partner withdraws from a partnership agreement or passes away, the agreement is no longer valid and can immediately be dissolved. A buy and sell agreement can be used to stipulate how a partner’s shares will be assigned in the event of a death or departure. These agreements often stipulate that the available shares should be sold to the remaining partners.
Other clauses that could potentially be included in a partnership agreement including:
Non-compete agreements can be used in a partnership agreement in order to restrict a partner from leaving the partnership or competing with the partnership within a defined geographic area for a set amount of time.
A non-disclosure agreement is designed to keep sensitive business information – including trade secrets – confidential. These agreements can and often should be used any time confidential information is disclosed.
Should partners find themselves at odds with each other, alternative dispute resolution options can be dictated by a partnership agreement as an alternative to litigation. Mediation is one such option wherein the process brings the disputing parties together to come to an agreement on the issues at hand.
Houston Contract Drafting Attorney
Business contracts help to allocate the risks, benefits, liabilities, and more among the parties involved. When drafting a contract like a business partnership agreement or negotiating its terms, it’s important to have skilled legal counsel on your side. At Feldman & Feldman, we have extensive experience handling a variety of contract matters. If your business needs assistance, contact our business lawyers today for more information.