What you need to know about business partnership agreements.
What is a partnership agreement and why do you need one?
A business partnership agreement establishes rules for two or more parties going into business together. It’s a legally binding document that outlines every detail of your business operations, ownership stakes, financials, responsibilities, and decision-making strategies. If you’re going into business with a friend, relative, or another business, you’ll need an airtight business partnership agreement. Learn more below about why they matter.
Business partnership agreements 101.
No matter how confident you are in your business, partnership, and working relationship, all co-owning parties will want to sign onto a business partnership agreement before going any further. A partnership agreement provides these essential benefits to your business:
- Clarifies roles and responsibilities. Business partnerships legally outline who is responsible for what in your business. Deciding this from the outset enables you and your partner(s) to clearly establish each of your duties to avoid confusion and miscommunication down the road.
- Establishes your business practices. Thinking through — and agreeing on — how you’ll run your business is crucial to a functional, successful operation. And outlining it in a legally binding business partnership agreement formalizes and enforces these practices.
- Reduces monetary disputes: Partners equally share in profits and liabilities, which can lead to disputes — especially if one partner is investing more time or money into the business. Business partnership agreements outline details on financial contributions and entitlements, and can help make profit sharing more equitable by basing it on partners’ contributions to expenses or start-up costs.
- Sets decision-making processes: Understand how you’ll resolve disagreements before they even come up by establishing voting rights in your business partnership agreement.
Make sure you get legal advice before developing your business partnership agreement to ensure it meets your own business needs.