In laymen’s terms, a “partnership agreement” usually refers to any written document between two or more individuals who want to run a venture together.
While it may not be one of the more fun aspects of starting a new business (you’d rather spend your time coming up with a name and logo, designing a website, building an app, or pitching your great idea to friends and investors), it is absolutely one of the most important things you and your partner should do before investing any time and money in the venture.
A well-written legal contract is mandatory for any business partnership so that the parties can clearly communicate their understandings for how things will be owned and managed between them. The agreement should be able to deal with every possible situation where there might be confusion, disagreement, or change as far as the management and operation of the business.
Terms of Art
First, however, an explanation on the correct legal terms for the kind of written business agreement we are talking about:
- A “partnership agreement” actually refers to the legal document that governs business owners who have chosen the partnership as their legal entity under which to operate.
- An “operating agreement” is usually the name given to the legal document that governs owners in a limited liability company (LLC). It is sometimes also called a “limited liability company agreement”.
- A “shareholders agreement” is often the name given to the legal document that governs owners in a corporation. Sometimes it may also be called a “founders agreement” or a “stockholders agreement”. A corporation’s owners may also put the provisions in their corporate bylaws.
What Provisions Do We Need?
No matter what your choice of entity, the written agreement between the owners of a business should cover these areas:
- Percentages of ownership in the business.
- Distribution of profits and losses from the business, including if salaries will be paid to the owners.
- Description of management powers and duties of each owner.
- What will happen in situations involving death, disability, divorce or disagreement.
- How the business can be terminated, including:
- How the assets and intellectual property (brand names, trade secrets) of the business will be distributed when the business winds down.
- If the owners are allowed to launch competing businesses or are subject to noncompetition provisions.
- How an owner can sell or otherwise dispose of his or her share of the business.
This crucial business document should be prepared when you start your business, and an attorney can be immensely helpful to make sure you include all-important “what if” questions and issues. A DIY partnership agreement risks not getting the wording right, and a poorly worded contract may be worse than none at all.
Even if you do not use an attorney to draft your document from scratch, spend the time putting something together that covers all the topics summarized above and then invest in having an attorney look it over once it’s done.
At the Law Offices of Daniel T. Goodwin, our attorneys have drafted, reviewed and negotiated hundreds of “partnership agreements” between business owners. We also have decades of experience litigating a wide range of disputes between business owners, which allows us to prepare comprehensive legal documents that will protect you in all those scenarios.