Starting a business with someone you trust can be exciting, but friendship and good intentions aren't substitutes for a solid legal agreement. A business partnership agreement can help establish expectations before disagreements arise and give each owner a clearer understanding of their rights and responsibilities. Whether you're launching a new company with a longtime friend, bringing a family member into an existing business, or starting a venture with another entrepreneur, putting important decisions in writing can help protect both the business and the people who own it.
Many business partners don't think about what could go wrong when everything is going well. That's understandable. You're focused on launching the company, finding customers, making sales, and building the business. But questions about money, decision-making, responsibilities, and what happens when one partner wants to leave can become much more difficult to resolve after a disagreement has already developed.
Creating a thoughtful agreement at the beginning gives the partners an opportunity to address those questions while everyone is still working toward the same goal.
What Is a Business Partnership Agreement?
A business partnership agreement is a legal document that establishes the rights, responsibilities, and expectations of the people involved in a business partnership. The agreement can address how the business will operate, how decisions will be made, how profits and losses will be handled, and what happens if circumstances change.
The exact provisions will depend on the type of business and the relationship between the owners. A simple agreement may not be appropriate for every business, particularly when the company has significant assets, multiple owners, employees, intellectual property, or plans for expansion.
The important thing is to create an agreement that reflects how the particular business is actually going to operate.
Do Business Partners Really Need a Written Agreement?
Partners may be tempted to rely on a handshake or informal understanding, particularly when they have known each other for years. Unfortunately, people can remember the same conversation very differently once money is involved.
A written agreement gives everyone something concrete to refer back to when questions arise. It can clarify who is responsible for particular tasks, how decisions will be made, and what happens if one partner doesn't fulfill their obligations.
A written agreement also gives partners an opportunity to address difficult situations before they happen rather than trying to negotiate while emotions are running high.
What Should Be Included in a Partnership Agreement?
Every business is different, but there are several issues partners should consider addressing in their agreement. Depending on the structure and circumstances of the company, these may include:
- Ownership Interests
- Initial Contributions
- Profit And Loss Distribution
- Management Responsibilities
- Voting And Decision-Making
- Authority To Enter Contracts
- Banking And Financial Controls
- Adding New Partners
- Selling An Ownership Interest
- Death Or Disability of a Partner
- Dispute Resolution
- Dissolution Of the Business
The agreement should be specific enough to address the actual way the partners expect to operate rather than relying on vague statements about everyone's intentions.
How Should Business Partners Divide Ownership?
Ownership is one of the first issues partners should address.
Two people starting a business together might assume they'll simply split everything 50/50. That can work, but it's important to think carefully about whether equal ownership actually reflects each person's financial contributions, responsibilities, and expected involvement.
For example, one partner may contribute more startup capital while another contributes specialized knowledge, equipment, or substantially more time. Those differences don't automatically mean the ownership percentages should be unequal, but they are worth discussing before the business begins.
Whatever arrangement the partners choose, it should be clearly documented.
Who Gets to Make Business Decisions?
Decision-making can become a major source of conflict when partners don't establish expectations in advance.
A business partnership agreement can outline which decisions an individual partner can make independently, and which decisions require approval from the other owners. Routine business expenses may be handled differently from major decisions such as taking on substantial debt, purchasing real estate, entering a long-term contract, or bringing in a new owner.
Partners should also consider what happens when they disagree. If two owners have equal voting rights and cannot reach an agreement, the business could potentially become stuck. Establishing a dispute-resolution process before that happens can give the partners a way forward.
What Happens If One Partner Wants to Leave?
People's circumstances change. A partner may want to retire, move to another state, pursue a different career, or simply stop participating in the business. Without a clear agreement, the departure of one owner can create significant uncertainty.
A partnership agreement can address whether a partner is allowed to sell their ownership interest, whether the remaining partners have the opportunity to purchase it, and how the value of that interest will be determined.
These provisions can be especially important when the business is expected to continue after one partner leaves.
What Happens If a Business Partner Dies?
It's uncomfortable to think about what happens if a partner dies, but it's an important issue to address. Without appropriate planning, the deceased partner's ownership interest may create questions about who becomes involved in the business and what happens to the surviving owners.
A well-drafted agreement can establish a process for dealing with a partner's death and may coordinate with the partner's broader estate plan. This is particularly important for closely held businesses where the owners don't want ownership interests automatically ending up with someone who has no role in running the company.
How Should Partners Handle Disagreements?
Even good business partners won't agree on everything. The question is what happens when they disagree about something important.
A business partnership agreement can establish procedures for resolving disputes before the conflict turns into litigation. Depending on the business and the partners' preferences, the agreement might address negotiation, mediation, arbitration, or other methods of resolving disagreements.
The appropriate approach will depend on the circumstances, but discussing the issue when the relationship is strong is usually easier than trying to figure it out during an active dispute.
Can a Partner Sell Their Share of the Business?
Partners should also think about whether an owner can sell their interest to someone outside the company. Most business owners don't want to discover that their partner has sold an ownership interest to a stranger without any opportunity to object. Restrictions on transfers can help address this concern.
A partnership agreement may establish requirements for offering an interest to the other partners first or require approval before an ownership interest can be transferred. The details should be tailored to the business and the owners' goals.
What If the Business Needs More Money?
Businesses sometimes need additional capital as they grow. Partners should discuss what happens if the company needs more money than the owners initially contributed.
Will each partner be expected to contribute additional funds? Will the business take out a loan? Can one partner contribute more money and receive additional ownership? What happens if one partner cannot or doesn't want to contribute?
These questions may seem hypothetical when a business is just getting started but addressing them in advance can prevent significant disagreements later.
Should a Lawyer Draft Your Partnership Agreement?
Online templates can provide a starting point, but a generic agreement may not address the specific circumstances of your business.
A business attorney can help partners identify issues that should be addressed and make sure the agreement reflects the structure and goals of the company. This can be especially valuable when partners have different financial contributions, responsibilities, or expectations for the future.
An attorney can also help coordinate the partnership agreement with other documents, including formation documents, buy-sell provisions, employment agreements, and estate-planning documents when appropriate.
What If You Already Have a Business Partnership?
You don't have to be starting a brand-new company to benefit from a written agreement. If you've been operating a business with a partner based on an informal understanding, it may be worth reviewing whether your current arrangement adequately addresses ownership, decision-making, financial contributions, and what happens if one partner leaves.
The best time to clarify an agreement is before there's a disagreement. Updating the business's legal documents while the partners are on good terms can be much easier than trying to negotiate after a conflict develops.
How Can Eldreth Law Firm Help?
Eldreth Law Firm provides business law services for companies and entrepreneurs in Raleigh and throughout North Carolina. Business owners can receive legal guidance on matters involving business formation, contracts, agreements, and other issues that affect the operation and ownership of a company.
Learn more about Eldreth Law Firm's Business Law services.
A business partnership agreement isn't about expecting your business relationship to fail. It's about recognizing that circumstances can change and giving everyone a clear framework for dealing with those changes.
When partners take the time to discuss difficult questions before they become real problems, they have an opportunity to build an agreement that supports the business and protects everyone's interests. Whether you're just starting a company with a partner or you've been operating together for years, reviewing your legal arrangements can be a valuable part of protecting what you've built.
