Hi folks, Dave waring here from Fitsmallbusiness.com and today's lesson of the day.
In our last lesson we continued our series on how to start a successful business, with
a look at how to choose a business partner.
In today's video we are going to continue that series, with a look at partnership agreements.
So let's get started!
A partnership agreement serves many purposes, two of the most important of which are getting
everyone on the same page about dispute resolution and business structure:
Dispute Resolution: Every relationship has disagreements, and this is especially true
in relationships where lots of decisions have to be made.
A carefully crafted partnership agreement allows you to outline how disputes are going
to be handled ahead of time, instead of in the heat of the moment.
Business Structure: The process of putting together a partnership agreement forces everyone
to think about and get on the same page about how the business is going to be structured
and run from the beginning.
This minimizes misunderstandings down the road, and hopefully prevents many issues from
occurring at all.
Should you use a lawyer to put together your partnership agreement?
If you can afford it, its almost always a good idea to have an attorney involved with
your business agreements.
However, most attorneys are going to bill you by the hour, and likely do not have the
same level of knowledge about your partners that you do.
Because of this, its always better to have a good outline of what you want in the agreement
before speaking to a lawyer.
If you cannot afford an attorney then I have linked to a resource page in the description
section of this video which includes some free templates.
Here is an overview of the Elements that every partnership agreement should contain.
The Basics
The name of the company and any other names that the company will be operating under.
Statement of the company's purpose.
Generally you will want to keep this fairly broad so you have the flexibility to adapt.
Responsibilities
Decide who is going to be responsible for which parts of the business.
As discussed in our video on how to find the right business partner, at a minimum you need
a partner involved with delivering your product and/or service, selling/marketing, finances,
and management.
List out any other areas that need to be covered and decide who is going to be broadly responsible
for those areas.
Workload
How will the workload be shared?
Answer the following questions:
Are partners expected to work set hours?
Does one partner plan on working more or less than the other partners?
How much vacation is allowed?
Will this be a full time role for each partner or are partners allowed to conduct other types
of business outside of the partnership?
If so then what types of business are they allowed to conduct?
Contributions
Next you want to determine what each partner is bringing to the business in terms of cash
investment, physical property (equipment, office space etc), and intellectual/other
types of property (software code, client lists etc.)
Once you have listed everything out you want to discuss what restrictions if any there
are on those assets.
Here are some examples:
Personal Property Example: You are starting a landscaping business and someone has a riding
lawnmower.
Does that mower become the property of the business?
Client list Example: You are starting brokerage firm and one of the partners brings clients
with them.
Does 100% of the revenue from those clients flow into the business?
Intellectual Property Example: Someone brings code for software into the business.
Is that code now owned by the business?
Can other partners modify it?
Compensation
This section should answer the following questions:
Will partners receive a salary?
If so how much and when.
If a partner is taking less salary will this be made up in the future?
Do you plan on reinvesting profits back into the business?
If so at what point do you plan on taking out profits?
How and when will profits be divided up amongst the owners?
(if based on ownership see next step) How will losses be handled?
Ownership Split
Now that you have decided on responsibilities, workload and which partners are contributing
what to the business, you can come to an agreement on how ownership is going to be shared in
the business.
I have included two resources for how to cover ownership splits in the resources link in
the description of this video.
Business Authority
This section should answer the following questions:
Contracts: Does each partner have the authority to sign contracts on behalf of the business?
Debt: Is the business going to have a credit line?
Keep in mind here that, depending on the business structure that you choose, each partner may
be personally liable for this.
Spending: Does a partner have the ability to make purchases without consulting the other
partners?
(Generally there is a limit that is set in the agreement above which point the partner
must obtain permission from the other partners.)
Partner Death/Disability
What happens if a partner dies or becomes unable to participate at the same level because
of a disability?
Most business owners probably do not want their deceased partner's heirs to be their
new business partners.
To prevent these types of issues a buy sell agreement will be included.
I have included a resource for crafting buy/sell agreements on the resources page which is
linked to in description section of this video.
Partner Exit
Answer the following questions:
Voluntary Exit: What happens if a partner wants to leave the partnership and pursue
other interests?
Involuntary Exit: Under what circumstances can a partner be forced to leave the business?
These questions can also be handled in the buy sell portion of the agreement.
Partner Disputes
Being able to discuss and come to an agreement on the differences of opinion that will arise
in any business is a must for any good partnership.
However, there will be times even in the best partnerships where you are not able to come
to an agreement on a specific topic.
Here are some ways that this can be handled:
The CEO has the final say.
One partner has the final say on a particular part of the business.
For example on hiring and firing disputes it may be the CEO, for product development
disputes the partner who is in charge of product has the final say.
Vote based on ownership.
Partners agree to use an outside mentor to resolve disputes.
Partners agree to use an outside advisory board.
Other more formal options are:
Mediation - Working with a professional mediator can help partners come to an agreement on
issues that they were not able to alone.
For more on this option see this article from attorney Emily Doskow at Nolo.com.
Arbitration - If you are not able to come to an agreement through mediation then Arbitration,
which binds the partners to the decision made by the arbitrator, is the next option before
going to court.
For more on this option see this article from Barbara Repa also at Nolo.com.
Litigation - If things get this far arbitration is usually the more efficient option but if
you want to have litigation as an option then define which state will have jurisdiction.
New Partners
What is the process for deciding on bringing in a new partner?
Majority vote?
some other method?
Selling the Business
Under what circumstances can the business be sold?
This likely goes back to the buy sell agreement.
That's our video for today.
If you have any questions or comments please leave them in the comments section below.
Also be sure to stay tuned for the next video in our series on how to start a business where
we will discuss how to choose a legal structure for your business.
For more free advice on how to start and run a successful small business visit us at fitsmallbusiness.com
today.
Thanks for Watching!