Are you prepared for a business partnership?
Too many people rush into a business partnership without knowing their partner in and out. There are some basic steps to take before building a partnership . First of all, you should only do business with someone you can trust. This may seem obvious, but background checks are often neglected, especially when both parties have known each other for a while.
Going over worst-case scenarios is another essential step. This will ensure that potential issues are addressed before they become real problems. The end result of this process should be an operating agreement, which legally defines how the business will be governed.
A partnership agreement should have the following components:
- 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 contributions: 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 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 major 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?
Obviously, these are simply broad topics, and some of these major issues have many sub issues that should be discussed in further detail.
Are you thinking about starting a business partnership? Learn more about our unique 4-step process for creating Operating Agreements.