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3 important inclusions in a partnership agreement

On Behalf of | Apr 3, 2024 | Business & Commercial Law

Establishing a new business partnership can completely change someone’s life. The right business partner can take a concept from a fantasy to a realistic way of generating revenue. Partners can contribute financial resources or expertise to help create a thriving new organization.

Unfortunately, there is a lot of risk inherent in deciding to run a business with another person. A business partner could fail to perform their duties. They might embezzle from the company, mistreat employees or overstate their personal qualifications early in the relationship.

All of these issues could lead to financial losses for a business partner. Business partnerships typically begin with the negotiation of a contract between the parties planning to start a company together. Due to all the risks involved, many aspiring entrepreneurs often proactively address the following concerns in partnership agreements to better protect themselves moving forward.

Terms for a future buyout

Partnerships may not work as well as people hope, and one partner may decide that they would prefer to continue operating the organization on their own. The buyout process can be stressful and might even cause financial damage to the business if there is a high level of conflict. Therefore, negotiating terms ahead of time to minimize the challenges of one partner buying the other out can help keep a company solvent and eliminate unnecessary conflicts between the partners.

Rules for conflict resolution

Business partners almost invariably find themselves disagreeing on certain issues. Whether they receive a surprise offer from a competitor to acquire the company they started together or one partner wants to outsource certain aspects of the company’s operations, partners may find themselves embroiled in intense conflict about how to run the company they own together. When such conflicts occur, they can damage the relationship between the partners and potentially cost the organization money. Taking the time to establish rules for conflict resolution in a partnership agreement, such as a commitment to attempt mediation before litigation, can help protect the company and preserve the relationship between the partners during times of temporary conflict.

Clear expectations for both partners

Nothing damages a business relationship faster than uncommunicated expectations. Both partners need to know what the other expects of them and what responsibilities they have to the business. They may also need to clearly outline the compensation that each partner might receive from the business if it proves successful. The more thoroughly partners discuss what they expect from one another and the company, the less likely they are to find themselves needlessly fighting over unmet expectations.

A solid partnership agreement is crucial for the protection of those who are planning to start a business with another person. Thinking carefully about the risks involved in a new partnership, and seeking legal guidance accordingly, may help people integrate the right terms into a contract with a prospective partner.