Just as marriages never begin with talks of divorce, business partnerships usually don’t begin with talks of dissolution. But unfortunately for both, divorce and dissolution are common outcomes. A business partnership agreement can help prevent dissolution by outlining the rights and responsibilities of each partner as well as the overall process for running the business.
These terms and conditions are decided upfront and compiled in a legally binding document. It is a form of protection for when times get tough, allowing all parties to operate under the same rules of engagement to reduce the possibility of confusion and conflict. Here are seven common provisions that should be included to make sure all partners—and the business as a whole—are set up for success.
1. Partnership Contributions
Many partnerships have one partner who funds the company with capital, while the other partner manages day-to-day operations. As such, it is important to clearly detail both the up-front and ongoing contributions of each partner. This should include everything from funding, time, and effort, to less obvious things like skills, equipment, supplies, and property. This section of the partnership agreement should also include the ownership stake of each partner, which is usually defined by their respective share of the total up-front contribution.
2. Partnership Distributions
The next important provision deals with how, when, and how much a partner will receive from the partnership’s profits. The how and when aspects of this point should consider the overall growth and health of the company, while how much is distributed to each partner is usually tied to their respective contribution and overall ownership stake. But the beauty of a partnership agreement is that it can be designed to fit the unique needs of each company.
3. Decision-Making
Because each partnership is unique in the partner contributions, they are equally unique in the division of time, labor, and responsibility. That is where the decision-making provision comes in. Not all decisions require sign-off from every partner. This section of the partnership agreement should outline the general types of decisions that need to be made and who is tasked with making them. This allows the business to run in an efficient and conflict-free manner.
4. Conflict Resolution
Perhaps the most important component of a partnership agreement is what to do in the event of a conflict between two or more of the partners. This should include an outline of administrative steps that can be taken to resolve the conflict internally, through mediation or other methods, in order to avoid litigation. The partnership agreement can be thought of as an anchor that will help to diffuse and resolve any potential disagreements.
5. Partnership Authority
This is similar to the decision-making provision but applies to actions that result in contractual or legal obligations involving the repayment of debt. Since these decisions can put the overall partnership at risk, the partnership agreement should outline the process for how such decisions are made. Not every partner will have the time, expertise, or desire to be involved; therefore, the overall levels of authority should be detailed in the partnership agreement.
6. Partnership Succession
A succession plan often involves a buy-and-sell agreement in which each partner agrees to buy out the departing partner’s share, either purchased outright or financed through life insurance. This is very important to include upfront in case a partner becomes incapacitated or unexpectedly retires. If there is no succession plan in place, the partnership may be forced to dissolve.
7. Partnership Dissolution
Some partnerships will go on forever, with multiple generations of successive partners; others will be developed with a particular goal or timeline in mind and dissolve once that milestone has been reached. Still others will dissolve due to irreconcilable differences that were not properly managed in the terms of the partnership agreement. Whatever the situation may be, the overall process for the dissolution of the partnership should be thoroughly outlined, allowing for a seamless transition for all parties involved.
What We Do & How We Help
It’s never too late to create or amend your business partnership agreement. We at Tree Street Advisory have experience identifying and implementing the unique needs of e-commerce partnerships. Call (615) 219-9802 or schedule a free 30-minute introductory appointment here to get started today.
Allan Phillips is a Certified Financial Advisor (CFP®) and founder of Tree Street Advisory. He works with E-commerce business owners and Physicians who are concerned with issues such as cash flow management, high-earner retirement planning, debt repayment approaches, tax strategies, and business planning.