Drafting a Partnership Agreement
If you decide to organize your business as a partnership, be sure you draft a partnership
agreement that details how business decisions are made, how disputes are resolved,
and how to handle a buyout. You'll be glad you have this agreement if for some reason
you run into difficulties with one of the partners or if someone wants out of the
The agreement should address the purpose of the business and the authority and responsibility
of each partner. It's a good idea to consult an attorney experienced with small
business for help in drafting the agreement. Here are some other issues you'll want
the agreement to address.
- How will the ownership interest be shared? It's not necessary, for example,
for two owners to equally share ownership and authority. However you decide to do
it, make sure the proportion is stated clearly in the agreement.
- How will decisions be made? It's a good idea to establish voting rights in
case a major disagreement arises. When just two partners own the business 50-50,
there's the possibility of a deadlock. To avoid a deadlock, some businesses provide
in advance for a third partner, a trusted associate who may own only 1 percent of
the business but whose vote can break a tie.
- When one partner withdraws, how will the purchase price be determined? One
possibility is to agree on a neutral third party, such as your banker or accountant,
to find an appraiser to determine the price of the partnership interest.
- If a partner withdraws from the partnership, when will the money be paid?
Depending on the partnership agreement, you can agree that the money be paid over
three, five or 10 years, with interest. You don't want to be hit with a cash flow
crisis if the entire price has to be paid on the spot in one lump sum.