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3 reasons to use a partnership agreement

On Behalf of | Apr 5, 2017 | Business Formation & Planning |

You may design a partnership agreement because it’s required by law, but it’s also a good idea to have one even if it’s not. A partnership agreement is a contract with all partners in a company. It defines what you do and what happens in certain situations. Here are three reasons to use a partnership agreement.

1. It defines your rights and responsibilities

It’s not easy to run a business, and it’s even harder if you or your partners don’t know what roles you play. A partnership agreement dictates who has which responsibilities. For example, Partner A has the role of marketing advisor and has access to the marketing accounts, while Partner B runs finances and accounting with access to all banking accounts. Knowing who has the right to which parts of the company helps in case something happens, like if funds go missing or if a task goes unfinished.

2. It defines how much you’re paying into the company

A partnership agreement also states how much you and the other partners are investing into this business. For instance, it may say “Partner A invested $100,000 while Partners B and C invested $50,000 each. Partner A has a 50 percent share in the company, while Partners B and C have a 25 percent share, respectively.” Additionally, you can add information about what happens if your business runs out of money. Will you decide to close the business if your initial funds run out, or have individual partners pledged more resources in the case that the initial contribution wasn’t enough?

It’s also a good idea to mark down information on contributions because one partner may not contribute financially but does in other ways. Indicating how that partner provides and its value is important in the case of later business troubles.

3. It defines what happens if the business fails

Dissolution is a very real consequence of a business failing or partners not wanting to participate in the business any longer. The time to think about a dissolution is when you first set up your business. This is when all the partners are likely getting along and willing to talk about exit strategies. You don’t want to wait until the business is failing, and everyone is stressed, to decide how to dissolve the business.

These are just three things partnership agreements discuss and dictate over the course of your business. It’s a good idea to create a partnership agreement and may be required by law so your attorney can help you get the process started.