Business partnerships are similar to marriages. Both partners work together to nurture the business and help it grow. But just like any other marriage or relationship, things can change over time. It’s important to be prepared for the worst – before the relationship and business goes sour.
One of the best ways to prepare for this type of situation is to create a “prenup,” or partnership agreement. While most states operate under the “UPA (Uniform Partnership Act),” or something similar, it’s still important to ensure that you craft your own partnership agreement to cover a variety of different scenarios.
What a Partnership Prenuptial Should Include
A partnership agreement should include the following:
What happens if one partner wants to leave the business? What procedure will you follow? How will the leaving partner be compensated for his or her stake in the company? This is especially important in the beginning stages of the business when shares may not be worth much.
Many partners overlook the importance of creating a management agreement. Who would hire employees? Who will run the business? Who will write the checks? Who will purchase equipment? There are a variety of different roles that each partner will have to fill, and a management agreement should clearly outline these roles. Clearly defining which responsibilities each partner will be held accountable for can help you avoid headaches in the future.
A buy-sell agreement will detail how equity transfer will take place. In most cases, business partnerships are created through a business connection or friendship. As a partner, you likely want to avoid working with someone you don’t know. A buy-sell provision will outline the process of transferring ownership shares, and who these shares can be transferred to. This particular agreement will protect you and your business by ensuring that you will never have to work with someone you may not know or like.
A distribution agreement outlines how an owner draws, losses and profits are handled. It’s important to clearly outline how partners will be paid, and when these payments will be made. Such an agreement can help prevent partners from accusing each other of skimming.
These are a few of the most important things to include in your partnership agreement. Creating a business “prenup” will protect you, your partner and your business should the worst happen. Partners often start out with the same vision and passion, but change and evolve over time to follow a different path. A solid partnership agreement will act as a “prenup” to ensure that all of your hard work will not have been for naught.
The Micklin Law Group, LLC is a New Jersey law firm specializing in family law and estates. Attorney Brad Micklin was recently named to The National Advocates list of Top 100 attorneys from each state. To set up a consultation, call 973-562-0100.