Some small businesses are created out of a partnership. Partnerships take advantage of the strengths of each partner for the good of the business. Additionally, the burden of starting a business is carried by more than one person which makes it lighter.
Unfortunately, you will most likely not agree on everything. What matters is how you handle the disagreements that come up.
With the knowledge that many business partnerships fail because of conflict between partners, it is important to start out on the right footing with an agreement.
This is a contract that is made between the business partners. It points out the responsibilities and rights of each partner right from the get go, heading off any problems before they even arise.
Some of the things covered in the agreement include profit disbursement, how much debt the business can get into, how one of them can exit should they want to leave the business and more. This ensures that everyone is reading from the same page.
It is a legal document that is often drafted with the help of an attorney.
Any proper partnership agreement will state clearly each person’s ownership interests. It could be 70/30, 60/40, or even 50/50. It will also have the details of the contributions made by each partner in terms of services, property or cash etc.
The rights of the partners will also need to be clearly stated. If there is a disagreement, who has the final say? What are the rights of the owners when it comes to selling their part of the business or give it out as an inheritance? Should one partner leave, how are their shares distributed among the partners that remain?
These and other rights must be clearly stated if you are to navigate a partnership successfully.
It is important to state how each partner will share in the profits and losses of the business. This is especially so if the money will not be divided equally.
The details should be clear in the partnership agreement that you draw up. Some of the things to consider will include allocation of profits, the percentage of profits reinvested vs. that which is disbursed to partners, how to deal with losses, how often to distribute profits, whether partners will get regular funds from the business and more.
Take time to work through the details of this area because money is a major source of conflict in partnerships.
This can take several different forms depending on what the partners would like to do.
Sometimes both partners can be running the business together, while at other times one partner will run the business while the other funds it. In some instances, you can find one partner is in charge of operations, while the other leverages a strength in numbers by handling the financials.
The important thing is to make sure that everything is being done and that no area of the business is overlooked. The partnership agreement should include the responsibilities assigned to each partner, and the managerial duties that they share.
Making sure everything is written down means that you can hold people responsible for their dockets.
One of the key benefits of having a partnership agreement in place is that it will help you avoid major conflicts.
Once everything has been discussed and put down on paper, most of the conflict issues have been resolved. However, it is important to understand that partnership agreements are not perfect.
You will often find that someone may have misunderstood something, or understood it differently, and in some cases, some may even think some things in the agreement are unfair. Your partnership agreement must have a clause on resolution of disputes.
Set out a clear process and procedure for handling any disagreements that come up. This may include taking a vote and arbitration or mediation.
This can happen due to planned or unplanned events. An unplanned event can include sickness or death, while a planned one may be the inclusion of a new partner. These scenarios should be taken into consideration such that the partnership agreement spells out what is to happen in such cases.
It should also talk about how to go through business dissolution. The point is to help you work through changes that may arise in the business structure without having to fight about it.
With time, you may find that you would like to turn your business into a corporation. The agreement needs to state how you can come to that decision and how you will handle the transition.
Since you are starting a business for the long haul, it is best to iron out the details ahead of time so as to avoid any nasty surprises in the future.
Ensure that you have a written partnership agreement.
If you need any further assistance, feel free to write to us and we will get back to you.
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