A collaboration between two or more people in a business venture is at times the best way to unlock commercial value. As a result, partnerships have always been a staple in any business environment in an effort to achieve this objective. But, such arrangements at their core constitute relationships between different parties. This brings with it the attendant complexities present when two or more people interact. This is why it’s necessary to have rules and regulations of the collaboration. These come in the business partnership contract form.
Approximately 65 percent of new business co-founded by a group of people fail. While choosing a good business partner is the first step in mitigating this, it doesn’t protect against future interpersonal problems. A business partnership contract is a primary means of managing these complexities for the good of the enterprise. Providing an advance framework by which partners ought to use in dealing with specified issues is prudent. This article looks at what a business partnership contract is, its benefits, steps to take when preparing it and what clauses to include.
What Is the Business Partnership Contract?
A business partnership contract is a legal agreement between two or more parties that seek to form a partnership. The agreement touches on the main areas that need addressing for the smooth collaboration of the interested partners.
It seeks to lay out the nuts and bolts of their working relationship to protect all parties involved.
An agreement is signed at the beginning of a business relationship that meets the criteria of a partnership. An objective look at future scenarios affecting the association informs the clauses it contains.
Who Uses a Business Partnership Contract the Most?
A business partnership contract is most useful to two or more parties contemplating forming a business together. It helps them have a means to deal with any conflict that inevitably crops up. It helps them lay out each partner’s responsibilities for the smooth running of the business.
In the event of a transition, it provides guidance that keeps the business on an even keel. By drafting it, every partner knows how much of the business they own and what compensation to expect. This helps avert remuneration-based conflict due to a lack of clarity.
Creating a Business Partnership Contract in 2 Steps
When thinking of a business partnership contract, there are some advance steps you ought to take and factors to consider.
- Agree on terms: You and your potential partners need to come to a mutually accepted understanding of the specifics of the potential partnership. The items agreed on here will inform the types of clauses to include when drafting the agreements. Discuss issues such as what duties each of you should handle, how to distribute the profits and losses, what goals the business ought to have, etc. A clear discourse on this spell out all the main issues that will inform the day-to-day operations of the partnership and therefore contribute to the business partnership contract.
- Research: Once you and your potential partners have outlined the basics, it’s important to research what a good business partnership contract entails. Consult a business attorney experienced in drafting such agreements to provide you with information on the legal exposure you will all have and how to provide for that in the agreement. Consult a tax attorney to learn what tax liabilities you will face knowing how to provide for that in the agreement too.
5 Essential Clauses to Include in A Business Partnership Contract
Once you and your partner have covered the steps in creating a business partnership contract, it is time to put it all in writing in a legally binding document. A sound agreement should include certain key elements through the clauses it contains. These are:
1. Decision Making
A clause stipulating how decisions are made is important especially in those instances where there isn’t any consensus on a critical issue.
A well-defied framework lays out the plan on:
- What decisions a single partner can make;
- Who handles the daily operational decisions of the business;
- Who is in charge of the long-term decisions.
2. Capital Contribution
This clause lays out the amount of money provided by each partner and how it translates into ownership.
- It presents an understanding of what steps to take should more capital be necessary than what is presently available.
- It also indicates what each partner further brings to the table other than the money, if that is the case.
How each partner gets remunerated is a critical issue that needs to be specified in the agreement. This clause explains:
- How every partner gets compensated when they can start taking money out of the business;
- Whether they get paid through profits or a salary.
Not every venture works out as planned and the business partnership contract should account for this possibility. This clause spells out the terms that the business will use in the event of winding up.
A partner who opts to leave should know:
- What their rights are;
- What is expected of them;
- In what ways they can use the contract to exit successfully.
5. Death and Disability
Another unforeseen possibility the business partnership contract needs to provide for is the likelihood of a partner’s incapacitation by death or disability. A partner who is no longer able to carry out their duties adversely affects business.
This clause provides a means to mitigate such a situation.
- Who inherits a dead partner’s shares?
- How much control of the firm do they receive?
- Is an incapacitated partner still eligible for profits?
These are all questions the clause addresses.
Singing the Documents
A business venture can greatly benefit from the complimentary skill sets that different partners bring to the table. When individuals join for business purposes, they form and operate in relational contexts. While there may be several issues that affect how partners interact with each other, a business partnership contract helps manage them. An explicit agreement contains clauses that give direction on capital requirements, death and disability, distributions, decision making and how to resolve any conflict.
Have you used a business partnership agreement in the past? Are you currently looking to create one? Share your thoughts with us below.
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