Partnership Agreements: What Small Business Owners Should Know

Going into business with a partner can be a great move, and a partnership agreement is what keeps the relationship on solid ground. It is a written document that lays out how the business will run and what happens when things do not go as planned.

The agreement typically covers ownership percentages and how profits and losses will be split. These do not have to be equal, and putting the numbers in writing prevents the arguments that arise when memories differ.

Decision-making authority is another key piece. Who can sign contracts? Who can spend money? What decisions require both partners to agree? Spelling this out in advance keeps day-to-day operations running smoothly.

The agreement also usually addresses the hard questions people prefer not to think about: what happens if one partner wants out, becomes unable to work, or passes away. Buy-sell provisions, which set the terms for buying out a partner's share, are a common feature.

Contributions matter too. Partners do not always contribute the same things: one might bring cash while another brings expertise or equipment. The agreement should reflect what each person put in and how that is valued.

Skipping the written agreement is one of the most common mistakes new partners make. Many people discuss the general terms with a small business attorney to make sure the key issues are covered.

Dispute resolution clauses are a smart inclusion. Rather than heading straight to court if partners disagree, many agreements require mediation or arbitration first. These approaches are generally faster and less expensive, and they keep private business matters out of public court records.

Non-compete and non-solicitation provisions sometimes appear in partnership agreements too. They address what happens if a departing partner tries to take clients or start a competing business. The enforceability of these clauses varies widely by location, which is worth understanding in general terms.

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This article is general information, not legal advice. It does not create an attorney-client relationship.