This will cover all possible business situations the partners may encounter and outline procedures to resolve conflicts. Some of the items our partnership agreement should cover include:
– The purpose of the partnership. Articulate the reason the partnership is being formed and describe the scope of the business.
– Capital contribution of partners. Who is putting in what in terms of cash and assets?
– Profit and loss sharing of partners. How will profits and losses be distributed?
– Voting rights of partners. Not all partnerships are necessarily equal. You may calculate voting rights based on the value of each person’s financial or management contribution.
– Delegation of management authority to partners. Determine who has authority to do what on their own, and when other partners must be involved before a decision can be made.
– Designation of a tax matters partner. Name one individual who is responsible for dealing with the Internal Revenue Service in the event of an audit.
– Disposition of a partner’s interest upon the death of that person. If not otherwise stated in the partnership agreement, a general partnership will automatically dissolve on the death of a partner. Plan ahead for a smooth transition and to protect the business and survivors.
– Methods to resolve tie votes between partners on crucial partnership decisions. How will you break a deadlock?
– Admission of new partners. As your business grows and changes, you may want to expand the ownership of the company. Know in advance how this will be done.
– Bank account signature authority. Who can sign and how many signatures will be required on bank accounts.
– Exit options. If one of you wants out of the partnership for any reason, how will it be handled? The typical method is a buy-sell agreement, and the details should be established long before it ever becomes an issue.