What should you include in a partnership agreement?

Entering into a business partnership with like-minded parties can be a very exciting yet complicated process. This is especially true when a business has multiple facets or there is more than one partner. Complex realities underscore the importance of drafting and signing a partnership agreement at the onset of a new venture.

A partnership agreement is a legal document that explains how a partnership will be run. It also explains each party’s roles and responsibilities. But not all partnership agreements are created equal. Here are three crucial clauses that you should never leave out of a partnership agreement.

Each partner’s contribution to the partnership

A business partnership that is one-sided is bound to run into trouble, unless one partner is intentionally joining a venture as a silent partner-investor. Thus, it is important that you are clear from the onset what each party is bringing onto the table. For instance, one party may be tasked with providing capital while the other will enlist their managerial or operational skills. It is important that each party’s roles are clearly articulated as well as what will happen should there be a violation of the expectations laid out in the agreement.

Profit and liability distribution details

People generally enter into a business (partnership or otherwise) primarily to make profits. Unfortunately, losses happen too. Your partnership agreement must clearly state how you will share profits and losses in turn.

Decision-making rights and responsibilities

If you ever pursued business as a sole proprietor, you made business decisions on your own. When you enter into a partnership, however, you can no longer make unilateral decisions concerning certain aspects of the business, especially those that involve finances. To reduce the risk of conflicts, it is crucial that you include a decision-making clause in your partnership agreement.

Building your partnership on a firm foundation

A business partnership can be a fruitful experience. However, the success of any business partnership depends, in part, on the strength of its partnership agreement. Learning more about California business law can help you draft an agreement that will better safeguard your rights and interests in a new partnership.