What to Include in a Partnership Agreement
Here's a list of the major areas that most partnership agreements cover. You and your partners-to-be should consider these issues before you put the terms in writing:
1.Name of the partnership. One of the first things you must do is agree on a name for your partnership. You can use your own last names, such as Smith & Jones, or you can adopt and register a non-personal business name, such as Westside Acupuncture. If you choose such a name, you must make sure with the state government that the name isn't already in use. Also, who will own the rights to this name should one (or more) partner(s) decide to leave?
2.Contributions to the partnership. It's critical that you and your partners work out and record who's going to contribute cash, property, or services to the business before it opens -- and what ownership percentage each partner will have, which is usually based, to some extent, upon the value of those contributions. Disagreements over contributions have doomed many promising businesses. Also remember, certain skills have financial value. For example, if one partner is an attorney, an MD, or an IT whiz, those skills could have great value to your partnership, even if that partner does not contribute more financial resources than any other.
3.Allocation of profits, losses, and draws. Will profits and losses be allocated in proportion to a partner's percentage interest in the business? And will each partner be entitled to a regular draw (a withdrawal of allocated profits from the business) or will all profits be distributed at the end of each year? If there are losses, how will they be covered? You and your partners may have different ideas about how the money should be divided up and distributed, and each of you will have different financial needs, so this is an area to which you should pay particular attention.
4.Partners' authority. Without an agreement to the contrary, any partner can bind the partnership without the consent of the other partners. If you want one or all of the partners to obtain the others' consent before binding the partnership in any legal or financial way, you must make this clear in your partnership agreement.
5.Partnership decision-making. Although there's no magic formula or language for who makes decisions among partners, you'll head off a lot of trouble if you try to work it out beforehand. You may, for example, want to require a unanimous vote of all the partners for every business decision that requires a financial expenditure over a certain dollar figure. Or if that sounds too encumbering, you can require a unanimous vote for major decisions and allow individual partners to make minor decisions on their own. In that case, your partnership agreement will have to describe what constitutes a major or minor decision. You should carefully think through issues like these when setting up the decision-making process for your business.
6.Management duties. You might not want to make ironclad rules about every management detail, but you'd be wise to work out some guidelines in advance. For example, who will keep the books? Who will supervise employees? Who will order supplies? How will marketing get done and what will you do if you think your partner is not pulling their fair share? Think through the management and work needs of your partnership and be sure you've got everything covered.
7.Admitting new partners. Eventually, you may want to expand the business and bring in new partners. Agreeing on a procedure for admitting new partners will make your lives a lot easier when this issue comes up. For example, will a certain monetary or time investment be required? Will profits and losses be fully shared immediately or increased slowly over a specific period of time?
8. Holidays and vacations. What if one of your partners decides to start taking an extra month of vacation every year… more than any other partner? Will their portion of profits remain the same in that case? You should agree on some specifics about how profit-sharing will be done for the vacation loving partner.
9. Maintenance of patient confidentiality. If you are on vacation and one of your partner must take care of your patients in an emergency, you need a legal agreement to maintain the confidentiality of those patients’ records.
10.Withdrawal or death of a partner. At least as important as the rules for admitting new partners to the business are the rules for handling the departure of an owner. You should set up a reasonable buy out scheme in your partnership agreement. For example, if a partner dies, you may not want the surviving spouse to be involved in management or financial decisions.
9. Resolving disputes. If you and your partners become deadlocked on an issue, do you want to go straight to court? It might benefit everyone involved if your partnership agreement provides for alternative dispute resolution, such as mediation or arbitration.
As you can see, there are many issues to consider before you and your partners open for business -- and you shouldn't wait for a conflict to arise before hammering out some sound rules and procedures. The more of these things you have on paper, the more likely you are to be able to maintain a friendship, no matter what changes happen to your business.
There are scores of internet companies that sell cut-and-paste downloadable partnership agreement forms for $10-15. If you really want to do it right, we suggest getting The Partnership Book: How to Write a Partnership Agreement, by Dennis Clifford and Ralph Warner.