Starting a business with a partner is exciting, but it’s crucial to lay a solid foundation from the start. While not legally required in Kentucky, a well-written partnership agreement can save you from future headaches. There are five key elements that every agreement should address to ensure a smooth and successful partnership.
Roles and responsibilities of partners
Clearly state each partner’s role and expected contributions. This could include:
- Financial investments
- Expertise
- Time commitments
This clarity helps partners know their roles in making the business successful and reduces the chance of disagreements.
Capital contributions and profit/loss distribution
Address the financial aspects of your partnership, including:
- Initial capital contributions from each partner
- How profits will be shared
- How losses will be handled
- Procedures for additional capital calls, if needed
Contributions and profit shares don’t necessarily have to be equal. However, your agreement should reflect what is fair for your specific situation.
Decision-making processes
Without clear decision-making rules, partners might disagree on how to run the business, leading to arguments and potentially harming the company. Your partnership agreement should include:
- Voting rights
- Quorum requirements
- Majority vs. unanimous decisions
By agreeing on these processes, you can prevent confusion and ensure all partners feel heard.
Exit strategies and buyout provisions
It’s crucial to plan for different situations in your partnership, such as when a partner leaves, retires or passes away. This ensures that, even when changes like these happen, your business continues without major disruptions or disputes.
Your agreement should cover:
- A fair way to value the business and a leaving partner’s share
- How to buy out a departing partner
- Rules about what a former partner can do next, like not competing with your business
These provisions can add a layer of protection for everyone involved – the leaving partner, remaining partners and the business itself.
Dispute resolution procedures
Even with the best intentions, disagreements can arise. Outline a clear process for resolving conflicts, which might include:
- Informal discussion and negotiation
- Formal mediation with a neutral third party
- Binding arbitration
By agreeing on these procedures upfront, you can often resolve issues more quickly and cost-effectively than going to court.
Laying the groundwork is crucial
Your partnership agreement is a roadmap for your business’s future. Consider working with an attorney to create a document that protects your interests and supports your business’s long-term objectives.