Drafting a partnership agreement can be tricky. One major hurdle? Making sure everyone's roles and expectations are crystal clear. If they're not, misunderstandings can spiral, leading to conflicts that disrupt the business.
In this article, you will get a straightforward guide on how to address this challenge effectively.
We will cover what to include in your agreement, why it's vital for safeguarding your partnership, and how following just a few best practices can make the whole process a breeze. Not just that, we’re also giving a free template for you to download, customize, and use for your own organization.
What is a partnership agreement?
A partnership agreement is a legal contract that sets out the terms and conditions between partners in a business. It includes details on contributions, profit sharing, roles, and how disputes are handled.
Why is a partnership agreement used?
A partnership agreement is used to ensure clarity and security in business operations among partners.
A partnership contract:
- Clarifies each partner's duties and responsibilities
- Outlines how profits and losses are shared among partners
- Provides strategies for dispute resolution
- Details processes for a partner's departure or the dissolution of the partnership
- Offers legal protection by defining the agreement in a legally binding document
Understanding common clauses in a partnership agreement
When you're setting up or reviewing a partnership agreement, it's crucial to understand the common clauses that form the backbone of these documents. Here's what you should look out for:
- Identification of partners: Clearly states who is involved, their legal names, and often outlines their roles within the partnership
- Business purpose: Defines what the business aims to do. This clause sets the stage for the partnership's objectives and activities
- Capital contributions: Specifies what each partner is bringing into the partnership, which could be cash, property, or other resources
- Profit and loss distribution: Describes the formula for dividing profits and losses among partners, which might be equal or proportional to each partner’s contributions
- Management and decision making: Details who manages the partnership and how decisions are made, whether through majority votes or unanimous decisions
- Salaries and drawings: Determines if partners will receive regular salaries and how money can be drawn from the partnership profits
- Meetings and voting: Establishes procedures for meetings and voting, including what constitutes a quorum for making decisions
- Authority and representation: Sets the extent to which each partner can make decisions on behalf of the partnership
- Admission of new partners: Outlines the process for adding new partners, including approval processes and contribution requirements
- Withdrawal or death of a partner: Provides procedures for a partner's exit, whether due to withdrawal, death, or incapacity, including how their share is valued and transferred
- Dispute resolution: Includes methods for resolving disagreements among partners, aiming to handle conflicts internally before resorting to litigation
- Dissolution and liquidation: Specifies conditions under which the partnership may be dissolved and how the assets will be distributed among partners
- Non-compete and confidentiality: Protects the partnership's interests by preventing partners from engaging in competing businesses and disclosing confidential information
Also read: How to Review Business Partnership Agreements
When to use a partnership agreement
A partnership agreement is not just a formality—it's a crucial tool for clarity and security in various business scenarios. Here’s when you should consider drafting one:
#1 When starting a new business venture
A partnership agreement is Ideal when two or more individuals come together to start a new business.
This ensures clarity from the start about business structure, capital contributions, and how profits and losses are distributed. This foundational clarity helps prevent future disputes and misunderstandings.
#2 When formalizing informal partnerships
The agreement is useful when informal business arrangements, like those between friends, need a formal structure.
You need it to establish clear roles, responsibilities, and equity stakes, turning casual agreements into binding commitments. This formalization helps safeguard the business's future and the personal relationships involved.
#3 When ringing in new partners
Partnership contracts are often recommended when expanding the business and introducing new partners for additional skills or capital.
It clearly defines new partners' roles and integration into the existing structure, ensuring smooth transitions and aligned expectations.
#4 When restructuring a business
This applies when a business undergoes significant changes in management, focus, or ownership.
You simply need to update the agreement to reflect new business directions and partner responsibilities, maintaining operational clarity and continuity.
#5 When planning for succession
The agreement is important for planning the future of the business when a partner retires, becomes incapacitated, or passes away.
It provides clear procedures for handling transitions, protecting the business’s continuity and the remaining partners’ interests.
Also read: How to Review Joint Venture Collaboration Agreements
Best practices to draft and manage a partnership agreement
Drafting a solid partnership agreement is key to laying a strong foundation for any business venture. Here are some best practices to ensure your agreement is clear, comprehensive, and effective in managing your partnership.
#1 Engaging all partners
When drafting a partnership agreement, getting everyone involved is crucial. Here's how you can do that:
- Set up meetings: Regular meetings are essential. They allow every partner to share their thoughts and contribute to the agreement. This way, everyone feels their input is valued
- Keep a consistent schedule: Having these discussions regularly keeps everyone involved and informed
- Use a neutral facilitator: Sometimes, it helps to have someone from outside the partnership guide the discussions. This can keep the focus on the main issues and ensure everyone gets a fair say
- Focus on clear communication: Making sure everyone understands each other is key to a good partnership agreement
- Keep records: Write down what you agree on in these meetings. These notes can help later if there's a disagreement
- Use simple language: Avoid complex legal terms. Make sure the agreement is easy to read and understand for everyone
“Avoid unnecessary complexity and shoot for short sentences. Always ask yourself if what you wrote down is clear – could a judge or jury understand the section if there was ever litigation? If not, rework it. For example, think about this statement, ‘This Agreement will terminate on August 31, 2021.’ Does this mean that it terminates when the day starts? When the day ends? And when does the day end? At the end of the business day, at midnight, and in what time zone? The better sentence is ‘This Agreement will terminate on August 31, 2021, at 11:59 p.m. Central Time.’ Be precise and concise!”
~Sterling Miller, CEO, Hilgers Graben
Ten Things: Making Contracts Easier to Sign
Also read: 10 Tips to Maintain Clear Contract Language
#2 Defining clear roles and responsibilities
To avoid confusion and ensure everyone knows their part in the partnership, you must define roles and responsibilities clearly in your partnership agreement.
- List specific duties: Assign specific tasks and responsibilities to each partner. This prevents overlap and ensures that all critical areas of the business are covered
- Detail decision-making powers: Specify who has the authority to make decisions in various areas of the business. This helps in managing operations smoothly and prevents conflicts
- Establish accountability: Make it clear who is responsible for each aspect of the business. This accountability helps keep the partnership running efficiently
- Update as needed: Business needs can change, and so might the roles within your partnership. Plan to review and update these roles periodically
- Hold review meetings: Schedule regular check-ins to discuss roles and any needed changes. This keeps the agreement up to date with the partnership’s needs
- Adapt roles to growth: As your business grows, roles may need to expand or shift. Be flexible and adjust responsibilities as required to fit the business’s evolving needs
#3 Listing all document contributions
You need to accurately record what each partner brings to the table in a partnership agreement. This includes money, resources, or expertise.
- List all contributions: Clearly document the initial contributions from each partner. This could be cash, property, technology, or specific skills that each partner contributes to the startup and operation of the business
- Specify contribution types: Be detailed about the type of contributions (monetary, physical assets, or intellectual property) and their estimated value
- Record ongoing contributions: Sometimes, partners contribute more than just at the start. Make sure to keep records of any additional contributions as the business progresses
- Link contributions to equity: Clearly define how these contributions affect each partner’s share in the business. This clarity helps prevent disputes about ownership and profit sharing later on
- Outline terms for changes: Set terms for what happens if partners want to increase their stake through additional contributions
- Review contributions regularly: As the business grows, the nature and size of contributions might change. Regular reviews of what everyone is contributing can keep the partnership agreement fair and up-to-date
- Adjust as needed: Be prepared to adjust the terms of the agreement if the balance of contributions and the value they bring to the business change over time.
#4 Designing decision-making processes
Establishing clear decision-making processes is crucial in a partnership agreement to ensure smooth operations and resolve disagreements effectively.
- Define voting rights: Clarify who gets to vote on what issues. Typically, decisions are either made unanimously or by a majority vote. Specify which decisions require which type of vote
- Major vs. minor decisions: Distinguish between major decisions that may require unanimous consent (like taking on new debt or selling the business) and more routine decisions that can be made by a simple majority
- Outline procedures for meetings: Describe how meetings will be conducted where decisions are made. Include how often meetings occur, how they are called, and what constitutes a quorum for making decisions
- Remote participation: Consider including provisions for partners who cannot be physically present to participate via phone or video calls
- Dispute resolution: Clearly outline what happens if there is a disagreement among partners
- Mediation or arbitration: Include steps for mediation or arbitration to resolve disputes before resorting to legal action. This can save both time and money
- Special voting arrangements: In some cases, you might establish a tie-breaker mechanism or appoint an external advisor for deadlock situations
- Document decision outcomes: Keep records of all decisions made, including who voted and the outcome. This documentation is vital for transparency and can be crucial in resolving any future disputes over what was agreed upon
Also read: Finding Common Ground: How to Resolve Contract Disputes
#5 Using technology to automate the partnership agreement process
If you think you can manage contracts without tech, you’re right. You can.
But do you want to spend weeks upon weeks creating them, getting redlining done, chasing people for approvals, only to get stuck in execution later? Wouldn’t you rather focus your energy on something more productive?
This is why it's best to embrace technology because SpotDraft makes this all a cakewalk! Here’s how:
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- Seamless integrations: SpotDraft connects seamlessly with your existing tools. Whether it's pulling data from your CRM or syncing with your HRMS, it keeps everything connected and flowing smoothly
- Custom templates on the fly: Need to tweak a template? No problem. Modify existing ones or turn your go-to contracts into custom templates with just a few clicks—no IT degree required
- Always up-to-date: With SpotDraft, you’re always using the latest version of your templates. This means no more worries about outdated terms or compliance issues
So, dive in and give SpotDraft a try!
Also read: Use SpotDraft Templates to Create Contracts in Minutes
Partnership Agreement FREE Template
If you're ready to draft a partnership agreement, we’ve got a free template to help you get started. It’s designed to be flexible and easy to customize to your needs.
Click on the download link or button to get your free template.
Using this template can save you time and ensure you cover all essential aspects of your partnership agreement. Remember, while the template provides a strong foundation, it’s important to tailor it to your specific situation.
Also read: 6 Tips to effectively write business contracts
Get ready to draft your partnership agreement in minutes
A well-crafted partnership agreement sets clear expectations, outlines responsibilities, and provides a roadmap for resolving potential disputes, all of which are essential for the smooth operation and longevity of your partnership.
Don't miss out on the chance to streamline this process. Use the free template in this post to get started on your agreement. It's designed to be flexible and comprehensive, making it easier for you to adapt to your specific needs.
Ready to take your contract management to the next level? Explore SpotDraft’s full suite of features for an even more seamless and efficient experience. From automated templates to integration with your existing tools, SpotDraft makes contract management a breeze.
