A Guide to Putting Together Your Partnership Agreement
By Jeffrey K. Davis, Esq.
WHAT SHOULD YOUR BUSINESS GOVERNANCE AGREEMENT ADDRESS?
The following is a 40-point checklist that you should use when drafting a business partnership agreement. This is not an all-inclusive list but I have to say, it’s pretty close and has broad applications for many industries. The purpose is to get you thinking about your rights, your expectations and the process of running a company with someone else. Use this as a guide, as a conversation starter, as a template for a well-vetted and successful partnership.
- Who will be involved in the day to day activities?
- Who will manage this company at a high-level?
- Who or how will the money be managed?
- How will decisions be made? For example, majority vote, unanimous vote, etc.
- What are critical decisions for you that require your approval?
- How will decisions be made with respect to acquiring property, personal property, real property, intellectual property, inventory, etc.?
- How will decisions be made with respect to selling or purchasing assets?
- How will decisions be made with respect to hiring, firing and disciplining employees, consultants, vendors, legal counsel, accountant, etc.?
- How will decisions be made with respect to the purchase of life insurance, liability insurance, disability insurance, general liability insurance and other insurances?
- How will decisions be made with respect to opening and maintaining bank accounts, borrowing money, lending money, bookkeeping, accounting, fundraising, or adopting a annual budget?
- How will decisions be made with respect to instituting, prosecuting and defending legal, administrative or other suits or proceedings in the Company’s name?
- How will decisions be made with respect to establishing pensions, and incentive plans for any or all current or former owners, Managers, employees, and/or agents of the Company?
- How will decisions be made with respect to fixing salaries for any member, manager, officer, director, etc.?
- How will decisions be made with respect to, contract management, debt collection practices, or receivables due to the Company?
- How will decisions be made with respect to Taking on new members/shareholders/owners
- Have you had a discussion with your business partner about the financial needs of the company?
- What are the financial needs of the company to stay afloat, and for how long?
- What is the company’s overhead?
- What do you need to break even?
- What will you need in order to keep the business afloat for 3 -6 months such as in the case of a global pandemic?
- Will you as business partners be contributing or lending money to the company?
- What sources of funding have you considered, such as loans vs. investors?
- What are your financial goals or expectations of the first 6 months? Year? 5 years?
- Will the company make any distributions or declare dividends? If so, under what circumstances? How often?
- What if there is an important decision that needs to be made and the owners are at a deadlock?
- How will you resolve disputes quickly and at minimal expense? NOTE: One option might be to put together an independent board of advisors that agrees to be the tie breaker specifically for deadlock issues. Another option might be to submit the claim to binding arbitration or mediation. Another might be to vest the final tie breaking decision in a trusted advisor.
Your Expectations in the Business
- Will you or your business partner be receiving a salary?
- Will you or your business partner be receiving any other form of compensation?
- Will you or your business partner be involved in the management of the company?
- Will you or your business partner be employed by the company ? What are your expectations with respect to being employed by the company? For example: for a set number of years, set salary, set job title, etc.?
- Will you or your business partner be required to devote a set number of hours per week/month to the Company?
- Will you or your business partner be expected to spend a minimal amount of time in the company office?
- Will you or your business partner be required to devote minimal number of hours per week/month to the company and its activities?
- Will you or your business partner be able to engage in competing or other businesses?
- Will you or your business partner be able to engage in other non-competing businesses?
Death of a Business Partner
- What happens if one of the principals of the partnership dies? NOTE: Usually this is handled by a buy-sell clause/contract that is funded with a life insurance policy.
Debt of a Business Partner
- What happens if any of the partners becomes financially insolvent and declares a bankruptcy, will you have to take on that partner’s creditors as your new partners?
- How will you protect the company from the debt’s of one of the business owners?
Divorce of a Business Partner
- Let’s say you’re a partner with Sally. But she and her husband Jim get a divorce and in the settlement Jim gets half of Sally’s interest in your partnership. Do you really want to be forced to take Jim into your partnership? How will you handle this situation?
Disability of a Business Partner
- What happens if one of the partners is hurt and is no longer able to contribute their time and talent to the partnership, how will this effect their ownership interest and the way profits are split? NOTE: Disability in my view is worse than death. You’ve lost your ability to make an income, it can be burdensome on your family (emotionally and financially), so if you’re business is centered around you, then why not consider something like disability insurance? And if that makes sense to you (which it should) then why not figure out how to have the business pay for it as a potentially deductible expense?