If you decide to form your business as a partnership, you will need to draft a partnership agreement that gives out the details of how the business responsibility, decisions and day-to-day running is going to be handled and distributed amongst the partners.
A very common partnership set up is when 2 to 3 people set up the business and share responsibilities and liabilities equally. However, the business share as well as executive authority is something that can be divided differently between different partners.
However, there are several other points that should be factors in an extensive partnership agreement such as how to handle a buyout when one partner decides to leave the company or the partnership is terminated. Having as many details as possible listed out in a partnership agreement is a good idea because it avoids future disputes and legal hassles.
The partnership agreement should effectively address the purpose of the business, the shared authority and responsibility of each partner.
A partnership agreement should always be drafted with the consultation and advice of a competent business attorney.
Here are some of the main issues that you will want to address in your partnership agreement.
How are the ownership interests shared?
It is not necessary that each partner has an equal share in the business and its ownership. Different business takes as the as level of authority can be decided according to the partnership agreement. For example, senior partners can have more share in the business as opposed to newer partners.
How will the decisions be made?
It is also a good idea to establish the Authority of each partner along with the voting rights in case of a major disagreement. If 2 partners in a business have 50-50 voting rights, there is a healthy possibility of a deadlock over some major business decision. In order to avoid such a deadlock some businesses provide in advance for a 3rd partner who could be a trusted employee or associate with only 1% of the partnership share. Such a person can break the deadlock with his vote.
How to handle the termination of partnership or withdrawal of any one partner?
You can decide beforehand how the business share of the partner who is leaving the firm, or whose partnership is being terminated etc. will get his share in the business liquefied. One option is to use a 3rd party such as a banker or an accountant to determine the fair price of the partnership trust.
If a partner withdraws from the partnership, when and how will the money be paid?
It is also a good idea to decide how the money is going to be paid to partner withdraws from a partnership. Having to pay the money all at once can put unnecessary burden on the business. Usually an agreement to pay the partnership interest of the partner over 3, 5 or even 10 years with interest is established in the partnership agreement. Failing to do so could mean that your business suffers a cash flow crisis if the entire amount has to be paid in a lump sum. This is an extremely critical point has no business can really operate without sufficient cash flow.