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A business partnership agreement is one way to ensure that both parties are protected when entering into a successful partnership. This guide takes you through quick tips to improve your partnership agreements that you can make now, as well as long-term strategies that are worth implementing.
Why are business partnership agreements so important
In short, business partnership agreements are important because they clearly outline legally binding details of how the business will function, how decisions will be made, how liabilities will be handled, or how finances will be managed. They protect your commitment to the business.
It is a way to ensure that there are clear rules for how your business partnership will work. If you are thinking of starting a business partnership without an agreement you can fall back on, you will inevitably encounter more problems than necessary. If you form a partnership with one or more people, you want to make sure that there are clear rules that are legally binding.
Take it from a classic case of two brothers who formed a partnership to enter the ice cream industry. They entered into a partnership agreement to get a bank loan. The agreement outlined that anyone who withdrew from the partnership could not compete with the existing business for a period of 10 years.
As it happens, one of the brothers withdrew from the partnership only months after the establishment and tried to compete by starting his own ice cream business. The brother was brought before the court for violation of the competition convention and had to award compensation to his founding brother.
It is situations like these that illustrate how important business partnership agreements are. Although it does not look like you might need one at first. It is better to be safe and cover all your bases from the beginning. That way, you avoid getting into serious situations that lead to expensive legal costs.
Quick tips to improve your business partnership agreements today
A business partnership agreement requires a legally binding contract. If you are starting the process up and do not have the money for an expensive legal team, you can start small and create a contract using a tool like Bonsai.
This makes it easy to create legally binding contracts that outline everything you need in an agreement. It even offers free partner template templates you can start working from to draft your own deal. This can be a great way for small businesses to get started as an alternative to trying to manage a deal on their own.
With Bonsai, you can manage all your contracts, whatever they may be. If you go through the process of writing and managing a business partnership agreement, the chances are that you are going to manage much more than just a contract. For $ 19 a month, you can start creating proposals, contracts, and collecting email signatures through your Bonsai account.
While you can use software like Bonsai to help you through the process of creating a business partnership agreement, there are still some quick tips and long-term strategies worth using that make the partnership agreement process easier. It starts with getting organized and gathering all your resources.
Get organized before you dive in
You will not enter into a business partnership agreement like a bull in a china shop. One of the most important steps you can take that sets the tone in how the rest of the process goes is to make sure to get organized first.
This includes being thoroughly informed about how business partnership agreements work, what types of agreements you can create, and what would work best for your specific situation.
To get organized you can:
Consider your tool for business partnership agreements Pay close attention to the values and requirements of your partners Be informed about best practices and what to avoid Create a list of legal requirements Create a list of permissions and licenses to be filed in addition to your business agreement
Once you have gathered everything you need, including your business partners, you will be able to create a better deal that does not spare any important details.
Know what a business partnership agreement should include
In general, a partnership agreement includes the following (although this is not an exhaustive list):
Partner’s basic personal information, including name and address Share of ownership for each partner Partnership liability The correct distribution of profits and losses How long will the partnership last How to resolve disputes in the partner Any confidentiality agreements What to do if a partner passes away or withdraws
Ensuring that you are specific about outlining in and out of each section will ensure that there is no gray area that could cause confusion or conflict in the future. Partnerships can quickly become complex. The more you have outlined on paper, the more organized and reliable your agreement will be.
Save multiple copies of your appointment
Once you have drafted your partnership agreement, it is always good practice to keep multiple copies in a safe place. A digital copy is great, but you should also have a printed copy on hand. Both if you somehow lose your digital copy, or because you may need it for future business procedures.
All partners involved in the partnership should have both hard and digital copies of the agreement. This way you avoid any risk of confusion, miscommunication or misunderstandings. With a tool like Bonsai, it’s easy to keep a digital copy of your appointments and print out any contracts, briefs or invoices you may need.
Know your business partnership types
Did you know that there are four different types of partnerships you can enter into? The choice you make will ultimately depend on what your legal and tax priorities are.
Here is a quick overview:
General Partnership (GP): This is one of the simplest partnerships and usually means that the benefits and responsibilities of the partnership are split in two. Everything that happens with the company is borne equally by all parties involved. It may not require you to register a business entity in your state.
Limited Partnership (LP): LPs are more formal and involve business investors who are not necessarily responsible for business commitments. Limited partners invest in a business and can win on their investments, but they can not lose more than they invest. The business owner bears all business obligations while making investments through an LP setup.
Limited Liability Partnership (LLP): If you form an LLP with one or more partners, you can all actively run the business while being protected from the actions of your business partners. If individual partners make mistakes that become liable, none of the other partners are responsible for those mistakes, financially or otherwise. LLPs are usually reserved for a variety of professions.
Limited Liability Limited Partnership (LLLP): An LLLP acts much like a limited partnership unless everyone has liability protection, not just investors. The partner who runs the company also receives liability protection. It is a newer type of partnership so it can come with its own pros and cons. Be sure to research carefully before choosing this option.
It goes without saying that clearly knowing and understanding the types of partnerships available to you will help you enter into the best possible business partnership agreement. You will be able to clearly define who is responsible for what, especially when it comes to taxes.
Long-term strategies for better business partnership agreements
We’ve reviewed some quick things you can do to improve the creation of your business partnership agreement. However, there are long-term steps you can take to ensure you cover all of your bases.
Understand your tax liability
With business partnerships comes taxes, and you will be well informed about how taxes are handled well in advance of your taxes being officially filed. This is likely to mean that you consult with a professional taxpayer who specializes in filing tax returns for business partnerships so that you know you are filing correctly according to the structure of your agreement.
Although you can do a lot of research on your own, it is always best to consult a tax expert. This way, you have peace of mind knowing that you have archived everything correctly. In the event that you are audited, you have many years of accurate records and archives to fall back on.
Obtain and collect copies of all licenses and permissions
Creating a business partnership and calling it a day will not really get you there. There are a few additional licenses and permissions you need to file to ensure you manage your business thoroughly.
These can be things like:
State-Specific Business Licenses Company Identification Numbers Industry-Specific Licenses or Licenses
Submitting additional licenses and permissions can help make your agreement so much more viable. In an emergency, you will not be caught without your ducks in a row.
Make sure you have an exit plan
All good things come to an end. This includes business partnerships. Outlining an exit strategy from the beginning can ultimately save you a lot of headaches along the way.
In other words? How are you going to dissolve the business if things went south or you just want out? An exit strategy clearly describes who gets what, as well as who is responsible for any or all of the obligations.
How will the withdrawal process proceed if a partner wishes to terminate? How much notice must the partnership receive to continue with the exit process? What is allowed and not allowed for partners when a partner leaves the partnership?
These are questions like these that you will want to consider when outlining an exit process. Even though you may think you do not need one or that you want to add one down the road, you will start with the right foot. Do not let important details like your exit strategy get away from you by choosing to skip the process.
Will your partnership choose a business insurance? There are lots of different insurance options you can go for that will protect your partnership in several ways.
Is there life or health insurance to take into account? Part of setting up a business partnership agreement is planning the unexpected. So you want to make sure you outline and have as many layers of protection as you can. Insurance, in addition to your partnership agreements, can be one of these layers.
A collaboration agreement should always be one of the first things on the table if you are planning to set up a business with one or more people. While in most cases it is best to consult with a business lawyer when drafting your agreement, software like Bonsai can help you take the first step in drafting a partnership agreement as a small business.
As you probably already know, there are many moving parts to successfully running a business. You may need to learn how to draft employment contracts while on board your first few employees.
If so, you will want to dive into this guide to learn all about employment contracts. The preparation of non-competitors is also part of the business management process. That’s why we’ve created this beginner-friendly guide that tells you when and how to create non-competitive.
Do you know the difference between exempt and non-exempt employees? If you do not and you plan to hire, use this guide in your corner.