Launching a new business with a friend or coworker is an excellent way to leverage your joint talents and skills for financial gain. Even though you trust each other, it’s still a good idea to formalize your partnership in writing with a legal agreement. Taking the time to develop a formal partnership agreement can help prevent problems before they start and help address minor issues before they snowball into a major problem.
Components to Include in Your Partnership Agreement
- Responsibilities: How will you divide up who is responsible for what? Each of you may have slightly different visions of your roles at the company and having job descriptions helps ensure that everyone has the same vision for each of your roles. This can help prevent duplication of effort as well as areas being overlooked since each of you thought the other was doing it. If new partners join at a later date, update the job responsibilities to include theirs as well.
- Worst-Case Scenario Planning: It’s no fun to think of everything that could go wrong in your business, but planning for the worst in your agreement ahead of time can make it easier to handle the bad times. For example, what if the two of you have a conflict that you can’t resolve? What if one partner wants to divest from the company? If one partner engages in illegal activity, what recourse does the other partner have to remove them from the company? What happens if one partner dies? Who owns the company’s intellectual property if the partnership dissolves?
- Compensation: How will you each be compensated? At what point will you start drawing a salary? Do you envision the company eventually going public or staying privately owned? Will you each invest the same amount as seed money? If not, how does this affect each of your ownership shares?
- Decision Making: How will you make decisions? Do each of you have an equal vote or will it be based on your percent of ownership? Do major decisions need unanimous approval?
Vision Statement
In addition to your partnership agreement, you and your partner should consider developing a vision statement. This document will outline your expectations about:
- The company evolving over time
- The management structures
- The type of culture you are looking to create for employees
Both documents together will form the basis of how you will run your business. If you and your partner are having disagreements about the documents as you are putting them together, you may want to step back and reconsider if you are going to be compatible as business partners. It’s also important that your partnership agreement is legally valid and complies with all applicable laws. An attorney who is knowledgeable in business law can help you with this. If you are looking to develop a partnership agreement, contact Rader Law. Our experienced attorneys can help you draft an agreement, ensure that it covers the key areas, and is legally valid.
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