Small businesses fall into one of two categories in relation to ownership: Sole proprietorships or partnerships. Being a sole proprietor gives the owner the opportunity to manage the operations, finance the business and distribute the profits earned however the individual chooses. In today's business world it can be difficult to generate the necessary funds associated with starting a small business without developing a partnership.
The two most common types of partnerships are general partnerships and legal partnerships. An oral agreement can constitute a general partnership, but a legal partnership requires a partnership agreement drawn up by an attorney. A partnership agreement is highly recommended in order to solve any disputes, which may arise among partners. They also help set the ground rules of running a business.
The details of the agreement may vary to accommodate individual needs, but three areas of the business partnership should be defined by any agreement — finances, management and separation.
Many aspects of the partnership need to be included in the agreement, but none are more important than the initial arrangements associated with the financial investments and returns for each of the partners. Money is the reason the partnership was created and money should merit the most attention to avoid unnecessary tension between partners.
The amount of equity invested by each partner, the division of profit and loss, operating expenses, salaries and compensation, and money borrowing procedures need to be spelled out right up front. If these procedures are not developed, agreed upon, and bound by written agreement, the partnership will suffer, and in turn the business will fail. Partnerships fail for numerous reasons, but almost always the actual failure can be linked to finances.
Once the initial investments have been put in place and the established pattern of cash flow is agreed upon, the next issue that often comes into play is power. Without a contractual agreement to define the infrastructure of management, partners will dispute who is actually running the show.
The duration of the partnership and the willingness, or lack of, to allow new partners should be determined and documented in the agreement. Power of attorney should be defined, as well as the duties of each individual partner. Deciding which partners will have the authority to make everyday business decisions will alleviate potential friction and allow the business to run in a time-effective manner.
Factors such as competition and unforeseen expenditures can stress a business relationship. What may appear to be a simple decision to one partner may not seem that way to another. Therefore, deciding in advance how to handle all aspects of the business operations should be part of the agreement.
Not all partnerships last. When the time comes to separate, the terms of the partnership agreement need to be instituted in a timely and orderly manner. In order to avoid legal action and unwarranted bickering, predetermined termination policies and established settlement percentages in the event of death or incapacitation are a must. Other terms associated with the separation should also be defined and executed.