Entering into a business partnership should not be taken lightly. Even if your new partner is your best friend, you'll want to make sure you plan ahead for all possible contingencies.
To help mitigate any future problems, business leaders from Young Entrepreneur Council recommend that these 10 elements be part of a partnership contract.
Before committing to any business partnership, what's something you should include in the partnership contract, and why?
1. A voting rights structure
As you get into a business partnership, you should clearly define the voting rights structure for any management decision. If each of you has a dedicated function, then you can decide that one person will have 100% voting rights for their functions. If you both share certain functions, you can define voting rights to be 50% each. —Piyush Jain, Simpalm
2. Clear roles, responsibilities, and contributions
Ensure the partnership contract clearly outlines each partner's roles, responsibilities and contributions before committing to a business partnership. Doing so avoids miscommunications and conflicts, leading to a more seamless and responsible working relationship. —Jared Weitz, United Capital Source Inc.
3. A dispute resolution clause
A critical element to include in a partnership contract is a dispute resolution clause. This should specify how conflicts will be managed, whether that’s through mediation, arbitration, legal action, or something else. By agreeing on a dispute resolution mechanism up front, partners can save time and prevent costly court proceedings. —Jack Perkins, CFO Hub
4. A crisis management plan
It is important to include a crisis management plan in your partnership contract. For example, when the pandemic happened, my partners and I immediately rushed to assess our challenges and set up fail-safe measures. These things should not be left until a crisis emerges. Include crisis management details in your contract so you know exactly what to do. —Syed Balkhi, WPBeginner
5. An explanation of how profits will be split
Make sure the partnership contract specifies how each party will split profits. Whether the profits distributed to each party are proportional to their revenue contribution or whether the profits are split evenly regardless of each party's effort, it's important to clearly state how each party will benefit financially from the business activities. —Nanxi Liu, Blaze.tech
6. A list of shared resources
Before committing to any business partnership, you should add a list of resources that will be shared by the concerned parties. Whether it's information, equipment, or human resources, what will be shared should be discussed beforehand and agreed upon by the partners. This way, they will be on the same page and there won't be any confusion down the road or room for potential conflicts. —Jared Atchison, WPForms
7. A non-compete clause
One thing you should always include in a partnership contract is a non-compete clause. This clause means your partners can't take company secrets or other relevant information you uncovered together and use it to create a product that competes with what you've already built. I think this is a wise choice because it protects your work, even if someone decides to move on to a new venture. —John Turner, SeedProd LLC
8. The metrics you'll use to measure goals
You need to know what is expected of each of you and the metrics you'll use to measure goals. If I'm responsible for revenue, I want to know how much I'm expected to bring in and within what time frame. If it can't be measured, it can't be improved, and running a business by the numbers is a good foundation for a healthy business partnership that won't go haywire because of a lack of mutual understanding. —Givelle Lamano, Oakland DUI Attorneys
9. A succession plan
Succession is an important topic to cover in a business partnership, and every partnership contract should include what will occur and who takes the reins when something happens. For example, who takes over if one partner has a serious family issue or fails to meet their commitments? Addressing this will create peace of mind and clarity in your partnership. —Blair Williams, MemberPress
10. An exit strategy
When setting up a business partnership, make sure there's an exit strategy in the contract—and be firm about it. You have to be clear on how you'll split the assets and handle the debts if things go wrong. This isn't just being smart; it's a must do to ensure you and your partner aren't left in a tough spot if the partnership hits a rough patch. —Idan Waller, BlueThrone
