Preparing the Perfect Written Partnership Agreement

Starting a business with a partner or bringing on a partner can take your business to a level of success you never knew possible -- or it can kill the company before you know what hit you. Drawing up a written partnership agreement can help alleviate some of the potential risks of a partnership, such as the problems that can arise if one partner wants to leave, retire, or sell their shares in the company. The partnership agreement should document how the company's profits are divided between partners, the partners' rights and responsibilities, the steps to follow when a partner leaves the business, and more.

Here are some important items to include:

Contributions: Spell out what contributions each partner will be making and what the responsibilities related to that contribution are. For example, if a partner contributes money to the business, is it strictly a monetary contribution with no decision-making say? It is critical to have a clear understanding among all parties.

Responsibilities: How will the company be managed day to day? It's a good idea to get down in writing all the partners' job descriptions so there aren't any points of contention over whose responsibility is whose.

Partner shares: Sometimes the percentage of shares assigned to each partner may change, especially in the event the business takes on investors. Make sure the partnership agreement is kept current and accurate, and that all partners are aware of their shares at all times.

Compensation: You need to record what, when, and how each partner is paid, including whether there are any bonuses and how those bonuses are determined.

Income: Determine and document how profits and losses will be shared among the partners.

New partners: Make sure to document in writing the process you will use for bringing on a new partner.

Dissolving the partnership: Determine what happens to the partners and the business if the company is dissolved. Make sure there are no gray areas. Will the business be divided among the partners, and any debts likewise divided? What if one partner decides to leave the business and the others stay on? What happens in the case of a partner's illness or death? And what happens to that partner's shares? Most agreements stipulate that the shares go back to the business, but in some cases, the shares may go to the partner's next of kin. In the latter situation, if you do not want the partner's family to have any say in the business, you'll need to draw up a process for the business to buy back the shares from the family member.

Timeline: Set up a schedule to review the partnership agreement regularly to make sure everything is current and determine if any changes need to be made. Since responsibilities in a small business tend to change as the company grows, setting up an annual review is a good idea.