Of all the formats for a new business — LLCs, corporations, S-corporations and so on — a general partnership is one of the easiest in many ways. If you’re starting a general partnership, you don’t necessarily need to file any paperwork with the Indiana Secretary of State, establish any special arrangements for taxes or jump through any of the hoops required for more complex business entities.
But if you don’t take some extra steps early on in your business formation, you may one day wish that your general partnership had a bit more structure and guidance.
Eventually, you and your business partners will disagree on something serious, and you will need a way to resolve that impasse. Eventually, one of you will want to retire or leave the business, and you will need to figure out how to manage that transition.
To get past these difficulties, it can be extremely important to have a business agreement in place.
Must-have items in your business agreement
A business agreement is a contract between business partners. It can specify many points about how they will run the business together, and can be tailored to meet any number of situations and needs. Still, there are some issues that commonly cause problems for partnerships, and it’s a good idea to include provisions in your agreement to deal with them. These include:
Contributions and distributions: In other words, the agreement should specify how much each partner is expected to invest in the business and how much they should expect to receive. If you’re all expecting to contribute be paid equal shares, it’s important to get that in writing. If you expect one partner to contribute more and be paid more, that too should be clear from the beginning.
Ownership and transitions: Just as it can spell out contributions and distributions, a business agreement can also detail the ownership of the business. For instance, it assign a certain percentage of ownership to each partner. This way, if the partners decide to sell the business as a whole, they know how to divide the proceeds. Likewise, if one partner leaves, the others have some guidance for how to buy out their share. A business agreement can also provide guidance for what to do if one partner dies or becomes unable to continue due to illness or injury. Likewise, the agreement can provide guidance on how to close down the business if or when you decide to cease operations.
Executive decisions: A business agreement can spell out issues of routine decision-making. If you don’t have such a provision in place, then you must make all decisions through consensus. This can be unworkable when your business grows larger and busier. Thus, your agreement might appoint one partner as the decision-maker for purchasing from suppliers and another for hiring employees or other common business operations.
Resolving disputes: Business agreements can also provide guidance for more unusual decision-making. If the partners are unable to agree on an important matter, the agreement can provide a way for them to resolve their dispute. For instance, it might require them to put the issue to a vote, or to go through mediation.
The issues we have discussed here are common in all kinds of partnerships, and it’s important for your business agreement to deal with them. However, your business is unique, and it’s a good idea to have an agreement that is drafted specifically for your needs.