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What clauses should you include in a partnership agreement?

On Behalf of | May 12, 2022 | Business Formation |

When two or more parties join hands to start a business, it is known as a partnership. A business partnership comes with its share of benefits and challenges. To ensure a thriving partnership, it is important for the parties involved to come up with an effective partnership agreement

Like in any contract, a business partnership must have certain clauses in order to be effective. The more comprehensive a partnership agreement is, the more likely it will be effective at addressing conflicts as they arise. Here are important clauses that every business partnership agreement needs:

Ownership structure

A business partnership should outline each party’s share of the pie. This is usually a function of their contribution to the partnership. A number of factors can influence the ownership percentage. For instance, one party may contribute finances to the business while another may bring management expertise or other skill to the table. And yet, another party may provide the infrastructure like a premise from where the business will be conducted. 

Profit and loss sharing

People get into partnerships to make profits. However, there are times when the business may make a loss. A good partnership contract should spell out how the partners will share any profits and losses realized by the business. Including these provisions in the partnership agreement will go a long way toward preventing potential disputes down the road. 

Leaving or dissolving the partnership

The agreement must articulate what will happen should a partner die or withdraw from the partnership. It should also indicate the procedure for removing a partner from the agreement. Basically, this involves including a buy/sell clause that will be used to value and buyout partnership interests when a partner is opting out. 

A partnership agreement is key for the success of any venture that involves more than one party. Find out how to can write a partnership agreement that safeguards your rights and interests.