The Importance of a Partnership Agreement

Depending on the nature of the venture, starting a viable business can be as straightforward as coming up with an idea, using some ingenuity, and deciding on a catchy domain name.

In the past, starting a business meant entrepreneurs needed access to large amounts of capital. Now, the internet is making access to production, distribution, advertising and marketing services inexpensive and accessible to anyone.

Without a barrier to entry, entrepreneurs need not fear the financial ruin that once accompanied the failure of a business.

However, people tend to forget the other potential risks involved in starting any business venture. These include ownership of patents or intellectual property, the division of ownership or procedures to dissolve the company.

Contracts minimize the inherent risk involved in a new enterprise by forcing partners to outline their expectations and give some forethought to possible complications.

Partnership Agreements

Contracts do not represent an inherent distrust among people; instead, they minimize potential misunderstandings or unreasonable demands.

People feel positive and are full of enthusiasm when they enter into a business agreement. The last thing a person wants to do is admit that the venture can fail or that existing business relationships will breakdown.

However, partners need to look past the negative connotations associated with contracts and see it as an unavoidable component of conducting business.

The contract is an essential component in protecting a person’s interests, securing a family’s welfare, and maintaining a company’s stability and viability.

First Drafts

Once you agree on a partnership, the next immediate step is to draw up the first draft of a contract.

Waiting too long increases the likelihood that polluted memories, inflated egos, and flared emotions will make future contracts hard if not impossible to hammer out.

Things to include in a first contract:

• Define the ownership of intellectual properties and patent rights
• A listing of the resources and capital invested by each partner and what is the expectation of repayment for those investments.
• How will the assets of the company be divided among the partners is the company dissolves.
• What percentage of the business does each individual own?
• If possible or if needed, what role will each partner fill in the company? (Marketing, research and development, production, sales etc) and what position will each person hold (President, treasurer, etc)
• Can a partner sell their interest in the business? In addition, outline the process to authorize a potential sale.
• Discuss any potential salaries, and the procedures and stipulations involved in drawing capital out of the business.
• Outline a timeframe or requirements needed to renegotiate the contract

Partners want to place strict restrictions in the contract that will prevent an associate from walking away with resources, data, concepts or customers critical to the company survival.

Once complete, there should be a reflection period for both parties to review the document and decide if the contract meets their basic requirements.

Before a person signs the contract, they need to make sure they are willing and able to commit the time and effort needed to run a new business.

Be mindful that unresolved doubts can fester over time and then materialize at some critical and inopportune time when they cannot be resolved.

Conclusion

Besides alleviating many of the uncertainties related to starting a joint venture, contracts certify the authenticity of a business and in the long-term acts as an incentive to work together and succeed.