So, as mentioned in Michael Gerber’s popular business book, The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It, you have an “entrepreneur seizure” one day probably after a frustrating day at work and decide you want to start your own business and be your own boss. Additionally, you decide the join forces with a partner and begin your journey to prosperity and fortune.
Not too fast though. Before you proceed any further into the partnership creation, there are steps and documentation you should have in place to plan for any unforeseen negative scenario. I’m not saying that you need to look forward to it or have it as your objective, but to plan for it in the event it happens.
Disclaimer here: I am not a lawyer but I did interview one for my podcast, SafeguardingYourBusiness, episode 2, with Glenn Solomon of Offit | Kurman, and he recommended the below steps.
If there’s more than one owner, the recommendation is that a partnership agreement be prepared and signed. Oftentimes, a new company decides not to do that because of the legal expense involved, because you are usually busy getting the new company started up with marketing efforts, hiring employees, buying equipment, and the other things that are needed.
Most of us just don’t want to spend the time on what we perceive at the outset as not necessary. Unfortunately, what happens often is you do not have a partnership agreement at the beginning and things are good. However, then there’s a dispute years later and with no agreement in place to resolve it, all too often the partners end up in litigation. To avoid that, partners should enter into a partnership agreement at the beginning.
Teamwork is a good thing. We can learn from the animal kingdom!
3 Essential Clauses Every Business Partnership Agreement Should Have
With a corporation, it’s called a stockholder’s agreement or a buy-sell agreement. With a LLC, they call it an operating agreement. But the purposes of the agreement are the same and should include, at a minimum, the following:
(1) How the company is going to be managed?
(2) How the money is going to be handled, how cash will be distributed?
(3) What happens upon the occurrence of some event to one of the owners? Specifically, what happens if an owner dies, becomes disabled, retires, or the employment of that owner is terminated?
It’s very easy to set forth in writing what happens under all those events. If you have that in writing and something happens later, all you do is pull out your agreement, and what happens will be dictated by it.
As a worst-case scenario, if you have to deal with partnership resolution and have the agreement, then you have your resolution already built in.