What should a partnership agreement include?

If you’re starting a business with another individual, it’s wise to create a partnership agreement. People are often tempted to skip over this step. They may be starting the business with a family member, a friend or a previous coworker and perhaps believe that the two of them are on the same page and there won’t be any issues.

But that’s a dangerous step to take. A partnership agreement gives people legal protection and helps define the relationship. Here are a few things that it should contain:

Each party’s position within the company

First off, the partnership agreement can help to define your roles and positions in the new company that you’re starting. Partnership disputes sometimes occur when there is overlap or confusion about these roles. Defining them at the beginning can help the business run smoothly.

The ownership percentage of each partner

Naturally, new business partners should be interested in knowing exactly what percentage of the business they own. If this is just a business with two individual partners, they may naturally assume that ownership will be split 50-50. But even if this is the case, it’s good to have that in writing to show that both people need to work together to make decisions for the business. No one has a majority and can make those decisions on their own.

An explanation of how income or profits will be paid

Finally, the partnership agreement can address how financial matters should be handled within the business. How much money is each person going to take as their income? Should they be paid a salary or are you just going to split up the money that the company earns every month? How much money will be invested back into that company? If you define all of these things in advance, then it drastically lowers the odds of a financial dispute.

It’s risky to start a business without a partnership agreement because it increases the risk of hurdles or disputes with business operations. It’s wise to know what steps you can take to set up this type of agreement in advance.

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