Creating Successful Business Partnership Agreements (4/29)

Creating Successful Business Partnership Agreements

"Not everyone is cut out to work in partnership," so says Azriela Jaffe, author of "Let's Go Into Business Together: Eight Secrets to Successful Business Partnering" (Avon, 1998). "Just as it takes a certain kind of personality to create a successful marriage or enterprise, a profile emerges of an individual who would have trouble partnering successfully, regardless of any sound business reasons they have for partnering."

Pre-planning is absolutely essential for anyone who may be considering a business partnership, and creating a partnership agreement is one way to avert danger that may be lurking down the road. While such agreements are not created solely for the purpose of addressing the end of the partnership, it is a way to express how you want your business, and your relationship with your partners, to operate. And, if all else fails, and partnering just isn't your cup of tea, Jaffe suggests creating brief joint ventures, hiring contract workers, or entering partnerships that are not considered "equal partnerships."

For those who do take the plunge, a good general partnership agreement should be written by an attorney. And it should cover all possible business situations the partners may encounter and outline procedures to resolve conflicts. Some of the items a partnership agreement should cover include (but are not limited to):

The purpose of the partnership. Convey the reason the partnership is being formed and describe the scope of the business.
Capital contribution. Who is putting exactly how much into the business in terms of cash and assets?
Profit and loss sharing. How will profits and losses be distributed between the partners?
Delegation of management authority. Determine who has authority to do what on their own and when other partners must be involved before a decision can be made.
Designation of a "tax matters" partner. The Internal Revenue Service requires a new partnership to name one individual who will be responsible for dealing with the IRS in the event of an audit.
Disposition of a partner's interest upon the death of that person. Who will take on his or her responsibilities, and what will happen to equity distribution?
Bank account signature authority. Who can sign and how many signatures will be required for transactions on the company's bank accounts?
Restriction of transfer. You can include a provision in your partnership agreement called a "restriction of transfer," which states that there can be no transfer of ownership without the partners' approval.
Exit/entrance options. If one of you wants out of the partnership for any reason, how will it be handled? Also, as your business grows and changes, how will you admit new partners into your business agreement?

"[A partnership agreement] could be used as the operating agreement for the business, like a business plan," says Jaffe. "The process of forming the agreement compels the discussions that partners should have, and provides a document to refer to when disagreement emerges or significant change in direction appears necessary after launching the business. Most [business owners] don't prepare for the fact that their partner relationships will change over time. A partnership agreement acknowledges this reality."