Starting and growing a business together can be tricky. New business partners are often unaware of the personal and financial sacrifices they have to make. You both may have different management styles, habits, boundaries, and levels of commitment.
This is our guide to help you draft a successful business partnership agreement.
Ownership of the Business
Splitting the Ownership
Ownership of your business should never be split equally between you and your partner(s). In the beginning, everyone is happy to be starting a business together, but things change as the company begins to take off or starts to fail. Eventually, partners will disagree with each other when it comes to shared ownership.
If neither side budges on what their share of ownership should be, the parties are in a deadlock. Louisiana does not have a statue that resolves such disputes, so if the parties haven’t previously agreed on how to settle the difference, you’re going to have to head to court.
Take finances into consideration when splitting ownership. Most businesses will need additional funding at some point. Consider you and your partner’s creditworthiness when splitting ownership.
What is a Partnership Agreement?
A partnership agreement is a broad term to describe the contract between the owners of a business. Most partners actually sign an Operating Agreement, which is the legal term for a Partnership Agreement among partners in an LLC. If the legal entity is a Corporation, the Partnership Agreement is technically considered Bylaws and Shareholder Agreements.
While the legal form of partnership still exists, it is not as widely used today because most partners form Operating Agreements. However, the concepts are generally the same, and we use the term “Partnership Agreement” to describe that contract.
These agreements will save time and money for you and your partner(s). The contents of this agreement will serve as a guide while operating the business.
The partnership agreement should include:
- Authorization and signing roles
- What is each partner allowed to do on behalf of the company?
- Responsibilities and duties
- What are the consequences of not fulfilling one’s responsibilities and duties?
- Capital distributions
- How much money is each partner investing in the business?
- Rights to receive distributions
- How much of a partner’s contributions can be returned?
- Voting process
- Which decisions require a unanimous vote of both or all partners?
- Dissolution strategy
- Which events will lead to a dissolution of the business?
- Buy-sell provision
- What happens if one partner leaves the business, dies, gets divorced, or goes through other significant life changes?
- Expulsion provision
- In which cases will a partner be forced to leave the business
- Noncompete provision
- How long will a business partner be unable to compete after leaving the company?
- Miscellaneous provision
- How will legal and other fees be handled?
These are merely broad topics, and some of these significant issues have many sub-issues that will be addressed in further detail.
Be sure to include a deadlock provision in the partnership agreement when determining how disputes will be handled. This provision is triggered when neither partner will budge and outlines how the conflict will be resolved. Since partnership agreements can be broad, there are multiple ways to word this provision:
Mediation or Arbitration
Partners have to resolve differences by stating their case to a third-party mediator. This mediator will help them resolve the dispute without any bias. Mediation is an expensive option as attorney and clerk fees can add up.
The ‘Texas Shootout’ method
One member would be forced to offer a price to buy out the other member, and another member can either sell his ownership at their price or purchase the offering member’s ownership at their suggested price.
51% Ownership
This decision will prevent deadlock situations as there is always one partner with majority ownership. Just keep in mind that the partner with majority ownership calls the shots.
The goal of a business partnership agreement is to make it mutually beneficial for both partners, which requires fairness and excellent negotiation skills. Before consulting an attorney, business partners should clarify common goals and visions. Bringing in an attorney covers the legal aspect of a business partnership agreement, also known as an operating agreement.
How to write a Partnership Agreement or LLC Operating Agreement
How to Write an LLC Operating (or Partnership) Agreement - DIY and Free!
If you have a business partner, you need a document that defines the rights and responsibilities of all the partners. If the partnership is organized as an LLC, that document is a Operating Agreement. Wondering what goes into one? This detailed video explains it all.
Your Business Partner
Getting a business partner can be a blessing or a curse. Before you decide to get a business partner, ask yourself if you need one.
It’s common for business partners to work well early on when some decisions are relatively easy to make. As the business relationship grows, choices will become more complicated, and disagreements will occur.
How to Find the Right Partner
Starting a business comes with complicated formalities, taxes, accounts, and finances. Having a business partner could help make handling these much easier. The first thing you should determine is whether you need a partner or if you should hire an employee.
A business partner is not necessarily someone who owns a part of the company and helps you run the business. Strategic business partnerships can be so much more. You can form the business with another company whose business goals align with yours and who is willing to help you grow. A company as a business partner is not equal to a merger because both companies stay independent. In the partnership process, they provide essential services to one another and either share their income or pay commission.
Great ideas often turn into a success when friends, college buddies, or family members become business partners. Those relationships tend to be innovative and creative, but quickly become problematic when formalities are left on the side.
Before you get into business with your partner you should work together on small projects, so you can give your partnership a test run. If you make a great team, you can start talking bout your common visions for the business.
The criteria for a good business partnership consist of different things but one of the most important would be how well the skills you both have that complement each other. Strengths should be different from one another.
Understanding their financial situation is necessary before officially partnering with others. Discussing finances could save you from trouble later on.
Here’s how to get started:
- Reach out to your network professional network a compile a list of candidates
Using your connections or referrals of colleagues is a great start. - Evaluate your chosen candidate
Take the time to learn about their personality, values, experience, and background. View resources like their social media, company websites, former partners, and other references. - Respect boundaries with your partner(s)
Once you decide on your partnership, be sure to set up the operating agreement and allow each other to handle the responsibilities defined.
Partnerships with Spouses and Loved Ones
Choosing a family member or close friend is often the obvious choice. Even though they might make it easier to raise capital, they can’t always bring the necessary skills to the table. If something raises an eyebrow, communicate and address it. Establish frequent reviews to keep the communication open and transparent.
Sometimes partnering up with a family member can be beneficial especially when you share many values that will keep the business growing. Regardless of your relationship to someone, there should always be an end goal you both are aiming for. The direction of the business needs to be clear from the beginning.
Friends and family members who are in business together often disregard the need for formalities. This is why partnerships between friends and family could be risky. Friend and spouses tend to neglect the planning aspect of building a partnership more than people who have no previous relationship. Strains can sometimes be put on the personal relationships you have with these kinds of partners.
Going into business together is the ultimate compatibility test for every couple. Becoming business partners allows you to get to know each other. In the process of building a business together, it’s important to have the same motivations while maintaining a healthy work-life balance.
If this kind of partnership works out, sharing every part of your life makes it easier to have common priorities when it comes to caring for your household and business. Achieving these goals and celebrating successes together will build on the business and personal relationship.
A spouse partnership can be beneficial as most couples have a deep understanding of their partner’s:
- strengths
- weaknesses
- communication style
- emotions
Strategic Business Partnerships
Business partners should always acknowledge personal boundaries, praise, and criticize appropriately, show respect, and be open to honest discussions. As leaders of the company, they must confront any challenges and clear up any confusion or resentment. Putting out small fires, in the beginning, will keep you from wasting your energy on managing negative emotions later on.
The benefits of business partners include:
- Reducing costs
- Increasing income
- Expanding the customer base
It’s best to get business partners for the following business needs:
- Sales Representation
Partner up with sales reps who have a network in your business industry. They could help land contracts with bigger businesses. - Fulfillment
Partnering with a fulfillment house could help with warehousing and shipping. - Manufacturing
Letting another company manufacture products for you can increase efficiency. - Marketing and Promotion
Targeted advertising can be the responsibility of a CMO or marketing director to increase outreach.
Other aspects such as white labeling, distribution, and licensing can also be skills you or your business partners should have.
The biggest cause of partner conflict would be the lack of thorough planning. And even the planning process can’t ward off all disagreements, but it will improve people’s odds of succeeding.
Systematically going through a list of issues both interpersonal and business is the key to avoiding conflict. Challenges will be much easier to overcome in the future because partners can routinely fail to share expectations of one another. Make an effort to create expectations of your partner and yourself to have the conversations you need to have.
Partnerships You’ll Want to Avoid
Who doesn’t know Ben & Jerry’s ice cream? It’s not only one of the most popular ice cream brands because of its taste, but also because of the successful business partnership between Ben Cohen and Jerry Greenfield. They became partners in 1978 and over four decades later they still work together and oversee the direction of the company. What makes their partnership work is they complement each other’s talents and share a common vision.
However, in worst-case scenarios, you’ll find yourself in court over failed partnerships. Initially, there should certain types of partners you need to avoid.
- Mr. Employee
Mr. Employee is a first-time entrepreneur with a pristine resume and an abundance of references. He enjoys collecting a weekly paycheck, health benefits, and eating dinner with his family nightly at 7 p.m. Unfortunately, Mr. Employee isn’t self-sufficient and doesn’t know how to move the business forward without you instructing his every move. Plus if your investment deal doesn’t pan out soon he is going to need to find a “real job” to pay the kids’ college tuition.
Tip: Individuals who do not share the priorities that you do will not be productive partners. Pass up individuals who cannot commit equal time, energy, and financial resources. - Mr. Perfectionist (also known as Mr. Procrastinator)
Mr. Perfectionist needs every “i” to be dotted and “t” to be crossed before he schedules an official product launch date. He enjoys researching competitors, building industry case studies, and improving his 150-page business plan. Mr. Perfectionist wanted the new business to be up-and-running by now but still feels something isn’t quite right. He plans on putting together another comprehensive survey to send to all of his colleagues, friends, and family in the next few weeks to help flesh out the concept further.
Tip: A good plan today is always better than a perfect plan tomorrow. Steer clear of excuse-prone procrastinators. Seek out self-starters who run with the ball and make things happen. - Mr. College Buddy
Mr. College Buddy had a stroke of genius while out at the bar one night, wrote it on a cocktail napkin, and asked you to help him “make it happen”. He enjoys bragging about his great idea and giving you directions on how to execute (he’s not into the “heavy lifting” thing). The issue: he’s moving across the country to start med school in the Fall. But fear not, Mr. College Buddy will make himself available by phone when he’s not studying, working, in class, or on a date. He’ll be sure to forward you the address where you can mail his 50% of the profits.
Tip: Never assume all of the risks in exchange for half the reward. Ideas are worthless without proper execution. Before you bring a co-conceived idea to fruition, make certain that your partner plans to be around for the long-run. Napkins are not legally binding. Always execute an operating agreement. - Mr. Inventor
Mr. Inventor thinks he’s created the next billion-dollar widget. He enjoys giving two-hour dissertations on Chinese electrical engineering standards to investors and making business decisions based on ‘nice people’ and ‘gut feelings’. Mr. Inventor doesn’t understand the phrase ‘in the black’ but feels it’s imperative to spend all of the company’s investment proceeds on research and development.
Tip: Brilliant academics are not necessarily brilliant businessmen. In place of a partnership, first, consider licensing deals or strategic partnerships. If you decide to go ahead with a partnership, be sure your agreements clearly distinguish the differences between product control and operational control. - Mr. Right
Mr. Right will be the first person to tell you that he is never wrong. His favorite phrase is ‘my way or the highway’. He will rarely discuss his decision-making process because he views such discussions as a weakness. He enjoys demeaning partners who don’t agree with him and making decisions without telling them. The funny thing about Mr. Right: he always seems to blame everyone but himself when his plans don’t pan out.
Tip: Communication is the key to a successful partnership. Find a collaborator, not a dictator. No one is always right. - Mr. Dreamer
You’ll hear Mr. Dreamer say this line a lot: “One day when we’re millionaires.” He loves talking about retiring by 29 and how he intends to spend his hypothetical millions on a gold plated yacht that he’ll dock off the coast of his private island. One small problem with Mr. Dreamer: he doesn’t seem to know how to keep the business above water next month.
Tip: Big paydays come from years of hard work and persistence, not excessive rambling and daydreaming. While your partner must be both positive and optimistic, it is equally important that he or she is grounded and focused. - Mr. Spender
Mr. Spender can’t possibly survive without a six-figure salary, lavish office, and an in-house cigar roller. Price is no object when it comes to entertaining a client or flying first class. If you’re lucky, Mr. Spender might even invite you to one of the extravagant dinner meetings that he charges on your company’s corporate card.
Tip: There is no such thing as an unlimited checkbook. Partner with fiscally conservative, financially responsible individuals who strive to make every dollar benefit company growth and development–not their lifestyles. - Mr. CEO
Mr. CEO feels compelled to tell everyone that he is a CEO within 30 seconds of meeting him–even if his company is worth less than the paper on which his business card is printed. He loves cocktail receptions, his name written in fancy fonts, and stacks of luxury car magazines neatly piled on a coffee table in plain sight of customers. The only thing he doesn’t seem to like: real work.
Tip: Successful companies are not built on titles, talking, and toys. Keep away from selfish, egotistical individuals who want to talk the talk versus walk the walk. - Mr. Vacation
I’d tell you more about Mr. Vacation, but I don’t know much about him. He never seems to be around.
Tip: No-shows are dead weight and eat away profits. Make sure that your operating agreement clearly outlines partner responsibilities and vacation days.And the partner to avoid like the plague is. - Mr. Personal Issues
Mr. Personal Issues always has a sad story. On the same day as your company’s keynote presentation at the big conference, his son’s wisdom teeth need to be pulled and his dog died of pneumonia. He would love to attend next week’s investor meeting, but his divorce hearing might tie him up all day. Unfortunately, Mr. Personal Issues can’t afford his legal bills, so he’ll need to pull a little more money out of the company this month to avoid his ex-wife from taking 50% of his equity in the settlement. Thankfully, this will be the last time he needs money.
Tip: You’re not in business to be a babysitter or a psychiatrist. Know everything there is to know about a prospective partner before you sign on the dotted line. Discuss everything from business to politics to family life to finances. If a potential partner seems to have a few screws loose, run as fast as you can in the other direction.
Managing Partnerships
Finances
According to San Diego based business attorney Robert J. Steinberger, 80 percent of business partnerships fail because they are undercapitalized or partners can’t agree on how to manage their business (including finances). Confusion is inevitable when partners don’t talk about money distribution and payment policies in the beginning.
Since people have different perspectives on money, its essential to discuss possible money issues upfront. The two most common problems are compensation and financial infidelity.
Your operating agreement should disclose how money is spent on equipment and tools, as opinions could differ. People have different lifestyles and while you have one partner willing to reinvest their salary, the other partner could want as much compensation as possible. Partnerships like this are likely to not work out.
Financial infidelity can be hard to detect if there is no proof, so make sure to establish a system for financial reporting. Another way to avoid fraud is to require both partners to sign checks that exceed a certain amount. Besides keeping track of your checks and balances, conducting a financial background check before signing a partnership agreement won’t hurt.
When Your Partnership is at Risk
A business partnership should be mutually beneficial and ultimately help the company reach its goals. Partnership problems can often be solved through counseling, but should ideally be settled with the help of an existing operating (partnership) agreement.
Some factors indicate whether your partnership is at risk:
- Lack of Communication
Communication should occur early and often prevent built-up frustrations. Seek objective feedback from a third party like a counselor or mentor. - Mistrust
If one partner has a hard time allowing the other partner to make solo decisions, the business process will be slowed down tremendously. - No Operating Agreement
Without an agreement in place, the smallest conflicts can be very costly. - Big Egos
Ideally, partners should be equally important for the company. To avoid power struggles, ensure everyone is clear on their role and authority. - Unclear Roles and Responsibilities
Confusion and disagreements will arise because everyone will not be able to fully know where they stand in the business. People with the skill set of the decision being made should be in charge of that decision.
Partnership Charter Process
The partnership charter is a process that helps partnerships come together by discussing important issues before jumping right in. Spera Law offers this service because it’s worth addressing the topics before any concrete business is done to protect any parties involved.
In addition to addressing topics like roles and salaries, you’ll be addressing personal topics that could affect the business. This could be health issues of one of the partners, personal lawsuits, spousal claims to business assets, and more.
Learn More about Partnership Charters and Business Partnership Agreements
Want to learn more about business partnership agreements? We offer an entire email series dedicated to the topic. There’s no charge, and you can learn on your own time. Click here to take our free course on partnership agreements.
You can also read more about the developer of the Partnership Charter, Dr. David Gage, on his website.
Tips for Lasting Partnerships
Partnerships are tricky but can be very rewarding for all parties involved. There are tips to follow that can help keep the partnership strong.
Know your strengths and weaknesses
Embrace the skills your partner has that’s different from yours. This will keep your business strong. One partner could be the brains while the other is an expert at sales. You’ll want to avoid duplicating the same efforts.
Talk about long term goals
Do you both have the same ambitions? How will the partnership get you both to those goals? Sharing the same vision will keep the business going.
Respect will go a long way
Just because you and your partner know each other’s weaknesses, doesn’t mean that either of you should take advantage of that. Disagreements will happen here and there but remain respectful of your partner’s thoughts and opinions.
Pick up the phone
We communicate in many ways like emails and instant messaging. When it comes to your partner, try to communicate mainly by phone. Remember you are partners and the business needs you both. Prioritize open communication and pick up the phone to let them know that the conversations you have together are important.
Take responsibility for your actions
It’s always the right thing to do. You would expect the same from your partner. Yes, you are a team but individual accountability is necessary as well. If you make a mistake, admit it quickly and move on to find a solution. Your partner will not appreciate calling you out.
Don’t sit on any issues with your partner
If you let issues fester, then that could cause you to blow other things out of proportion. Get what you need off your chest when things occur. It keeps the communication strong.
Define small problems vs. big problems
Everything that happens will not be major and most will not be. It helps to be reminded of that. Whenever you’re overreacting, you want your partner to be able to lean over and ask, “Is this a big problem or small problem?”.
Support one another
If you find yourself secretly wishing ill will towards your partner, something is seriously wrong. Partnerships are a never-ending work in progress. Support them and celebrate them for all the wins they achieve.
Communication
Effective communication not only between yourselves but with other parties should be developed as time goes on.
Negotiation
There are a few things to follow when negotiating. Keep these rules in mind:
- Don’t try to fight for every single percentage possible when discussing revenue splits. You want things to be fair and sometimes even splits okay when both partners contribute significantly.
- Everyone should be on the same page by the very end of every negotiation. Partners should agree with each other on decisions made. No negotiation should end with a partner not completely agreeing with a decision.
- When discussing long term goals, they need to benefit everyone. One partner should not ever be the only one benefitting.
- Be considerate of your partner’s concerns and make deals with your partner that you would want for yourself.
- Your partner shouldn’t just have skills that complement yours, but also the good character and be trustworthy.
Negotiations don’t have to be some intense debate. There are things every partner can do to make this a smooth process.
Tips on Communication
Good communication is not only necessary to run the daily operations of a business, but can ultimately affect the profitability of your business. It’s important to realize that communication also includes nonverbal clues such as facial expressions, body language, and tone.
Detailed communication is the best communication. You and your partner will depend on one another to exchange valuable information. Be in touch with anything the other is doing.
You should be 100% honest at all times. Even small lies can harm your credibility. Resentment makes it much harder to regain trust. Credibility can also be ruined by not keeping your word. Told your partner you’d have an important task done by the end of the day? Then complete it by the end of the day to meet your promised deadline.
Share useful resources with your partner. Whether it be tools, relevant articles, or apps, it only helps the business. It offers more opportunities for partners to discuss the common vision for the business.
These days where social distancing is preferred but don’t underestimate in-person communication. It can be difficult to nurture a partnership through emails and texts.
Take time to understand what makes each other tick and remove uncertainty while planning for the future. Sometimes using a business coach or third party is helpful to make sure everyone understands each other.
Dissolving Partnerships
Regardless of the partnership at the time of starting up, it is important to plan for dissolving the partnership at some point. Some entrepreneurs choose partners who can only satisfy short term needs when ideally you should choose a partner for the long term.
Failures
It will be a waste of time and energy to hope your partner will change significantly. If your partner is not a good fit, in the beginning, chances are low that you can overcome those differences.
Partnerships fail also by having no reporting system in place. Things will slack as well as be swept under the rug resulting in bigger issues later on.
Equal liability can result in dissolving a partnership because it will cause conflict. Partners can avoid this by creating a limited partnership where one partner is not liable for the actions or obligations of the other partner.
Many other factors bring partnerships to an end like non-formal operating agreements, lack of trust and respect, and non-consistency. Planning a separation is important because even things beyond the control of you both can happen too.
Exit Strategies
You don’t want the dissolving process to be difficult and expensive. Planning how this will happens when the time comes makes it less painful for those involved. In legal terms, we call this business succession planning. Even if your business isn’t making common mistakes resulting in a failed partnership, things like a partner’s health condition or untimely passing could result in dissolving a partnership.
Partners need to determine a valuation formula at the beginning of the business partnership. To do so, the partners probably need to understand company finances. Attempt to negotiate a buyout with your partner. This can be done by looking at your:
- Capital investments in the business
- Percentage of ownership
- The relative value of your shares
Once you both agree, execute an Assignment of Membership Interest form. Have a lawyer draft up the form and it will disclose additional terms that will protect both parties after the sale of the buyout. Obviously, drafting partnership agreements is something we can help with.
Let’s say you and your partner could not agree on the buyout price. Now you will need to view the operating agreement. If the agreement has forced buy-sell provisions or a procedure that can be done in the event of a dispute. Those quick online operating agreements do not include the appropriate provision.
Worst-case scenario if no agreement is still made, sometimes you’ll have to end up just leaving the company. Discuss this with an attorney as this is a risky option that the partner still is the business could allege you sabotaged by departing.
It’s important to establish legally binding expectations at the beginning to avoid unnecessary costs. If there is no exit strategy, business partners could decide to split their costs of dissolving the business, including legal fees. This will also serve as documentation that both parties have agreed to end the partnership.
Lastly, if your partnership ends in a hostile dispute, stay reasonable and kind. Sometimes it’s smarter to be generous instead of risking litigation only because you want to get even with your partner.
Conclusion
Remember before starting any partnership journey, make sure that’s the right decision for the business and yourself. There is always the option of an employee or freelancer if your not ready to have partners. Reach out to your business attorney and have them help you.
Frequently Asked Questions about Partnership Agreements and LLC Operating Agreements
What is an LLC Partnership Agreement?
Techncially, an LLC will never have a partnership agreement. If more than one person has an ownership interest in an LLC, those business partners should have an Operating Agreement. A partnership agreement refers to the document between partners in a legal partnership, which is a legal structure that pre-dates and has largely been replaced by limited liabilities companies. Actual partnerships are rare and only used in specific circumstances.
What is an LLC Operating Agreement?
An operating agreement is the key document negotiated by the members of limited liability companies that outlines the business' financial and functional decisions including rules, regulations, and provisions. The document itself can vary from just a few pages to dozens of pages.
