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What are topics a partnership contract should address?

On Behalf of | Jul 2, 2024 | Business & Commercial Law

Some entrepreneurs do not want to start a business alone. A second person may have financial capital or experience that is critical to the success of a proposed company. If you plan to form your first business partnership, you should know what to cover in your agreement.

Businesses can easily fall apart with an incomplete or unclear founding contract. While partnerships greatly vary, there are still commonalities any partnership agreement should include.

Ownership shares

Not every business partnership is a 50-50 proposition. Many co-owned businesses have varying degrees of ownership, manifested as a percentage interest. So it is possible you or your partner will have a majority or a minority interest, which your contract should define.

Making decisions for the business

Your agreement should make it clear how the business arrives at decisions. This may involve requirements of unanimous decisions or majority votes, or specific assignment of decision-making powers to different partners. This helps ensure that no partner feels slighted by a decision that the partner does not agree with.

Contributions and profit distributions

Another basic question is to determine how much a partner should contribute and then receive in profits. Some partners only provide cash. However, partnerships can also include property donations or physical labor on behalf of a partner. Similarly, your agreement should make it clear how each partner will receive compensation for what they put into the business.

The exit of a partner

At some point, you or your partner may elect to leave the company. A clear exit strategy in your agreement allows a departing partner to sell off or surrender their ownership share, and to designate whether the surviving partner receives the share or if someone else does so.

The agreement should also address involuntary departures, such as the imprisonment of a partner due to a criminal conviction, a disabling health condition, or death. You may include a buy-out provision that allows one partner to purchase the interest of the departed partner.

Though these basics are important to include, your partnership agreement may cover any issue you feel could affect the continuation of your business. No business contract should be rushed through. Careful consideration is in order to help your agreement keep your business operating well into the future.