The Complete Guide to Business Partnership Agreements

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A business partnership agreement is a way to ensure both parties are protected as they step into a successful collaboration. This guide takes you through quick tips to improve your partnership agreements that you can do now as well as long-term strategies worth implementing. 

Why Are Business Partnership Agreements So Important

Summed up in a few words, business partnership agreements are important because they clearly outline legally binding details about how the business will operate, how decisions will be made, how liabilities will be dealt with, or how finances will be managed. They protect your involvement in the business. 

It’s a way to make sure there are clear rules for how your business partnership will function. If you’re thinking of starting a business partnership without an agreement you can fall back on, you’ll inevitably run into more trouble than necessary. If you’re forming a partnership with one or more people, you want to make sure that there are clear rules to follow that are legally binding.

Take it from a classic case of two brothers who formed a partnership to go into the ice cream business. They drew out a partnership agreement in order to get a bank loan. The agreement outlined that anyone who withdrew from the partnership couldn’t compete with the existing business for a span of 10 years. 

As it happens, one of the brothers withdrew from the partnership just months after establishing it and tried competing by starting his own ice cream business. The brother was taken to court for violating the non-compete agreement and had to award his founding brother damages. 

It’s situations like these that illustrate just how important business partnership agreements are. Even if it doesn’t seem like you might need one at first. It’s better to be safe and cover all your bases from the very beginning. That way, you avoid getting into serious situations that lead to costly court expenses. 

Quick Tips to Improve Your Business Partnership Agreements Today 

A business partnership agreement requires a legally binding contract. If you’re bootstrapping the process and don’t have money for a costly legal team, you can start small and create a contract with the help of a tool like Bonsai. 

It makes it easy to create legally binding contracts that outline everything you need in an agreement. It even offers free partnership templates you can start working from to flesh out your own agreement. This can be a great way for small businesses to get their start as an alternative to trying to manage an agreement on your own. 

With Bonsai, you can manage all your contracts, regardless of what they may be. If you’re going through the process of writing and managing a business partnership agreement, chances are you’re going to be managing a lot more than only one contract. For $19 a month, you can start creating proposals, contracts, and collecting e-signatures through your Bonsai account.  

Though you can use software like Bonsai to help you through the process of creating a business partnership agreement, there are still some quick tips and long-term strategies worth using that’ll make the partnership agreement process easier. It starts with getting organized and gathering all your resources.  

Get Organized Before Diving In 

You don’t want to go into a business partnership agreement like a bull in a china shop. One of the most important steps you can take that’ll set the tone of how the rest of the process goes is making sure you get organized first.

This includes being thoroughly informed about how business partnership agreements work, the types of agreements you can create, and what would work best for your specific situation. 

To get organized you can:

  • Consider your business partnership agreement tool
  • Be thoroughly aware of the values and requirements of your partners
  • Get informed on best practices and what to avoid
  • Create a list of the legal requirements
  • Create a list of permits and licenses that need to get filed in addition to your business agreement 

Once you gather everything you need, including your business partners, you’ll be able to create a better agreement that doesn’t spare any important details. 

Know What A Business Partnership Agreement Should Include

Generally, a partnership agreement contains the following (though this isn’t an exhaustive list):

  • Partners’ basic personal information including name and address
  • Percentage of ownership for each partner
  • Partnership responsibilities
  • The proper division of profits and losses
  • How long the partnership will last
  • How you’ll resolve partner disputes
  • Any non-disclosure agreements
  • What to do in case a partner passes away or withdraws 

Ensuring you’re specific about outlining the ins and outs of every section will ensure there isn’t any gray area that can cause confusion or conflict in the future. Partnerships can get complex pretty quickly. The more you have outlined on paper the more organized and reliable your agreement will be. 

Keep Multiple Copies of Your Agreement

Once you’ve drawn up your partnership agreement, it’s always good practice to keep multiple copies in safe spaces. A digital copy is great, but you should keep a printed copy on hand too. Both in case you somehow lose your digital copy or because you might need it for future business proceedings. 

All partners involved in the partnership should have both hard and digital copies of the agreement. That way, you avoid any possibility of confusion, miscommunication, or misunderstandings. With a tool like Bonsai, it’s easy to keep a digital copy of your agreements and print out any contracts, briefs, or invoices you may need. 

Know Your Business Partnership Types

Did you know there are four different types of partnerships you can enter into? The choice you make will ultimately depend on what your legal and tax priorities are. 

Here’s a quick overview:

General partnership (GP): This is one of the simplest partnerships and usually means the partnership gains and responsibilities are split in half. Anything that happens with the business is shouldered equally by all parties involved. Also might not require that you register a business entity within your state. 

Limited partnership (LP): LPs are more formal and involve business investors that aren’t necessarily responsible for business liabilities. Limited partners invest in a business and can gain from their investments, but they can’t lose more than they invest. The business owner shoulders all business liabilities while taking investments through an LP setup. 

Limited liability partnership (LLP): If you form an LLP with one or more partners, you can all actively operate the business while staying protected from the actions of your business partners. If individual partners make mistakes that become liabilities, none of the other partners are responsible for those mistakes, financially or otherwise. LLPs are usually reserved for a select set of professions. 

Limited liability limited partnership (LLLP): An LLLP works much like a limited partnership except everyone has liability protection, not just the investors.  The partner who manages the business also gets liability protection. It’s a newer type of partnership, so it can come with its own set of pros and cons. Make sure you do your proper research before opting for this option.  

It goes without saying that clearly knowing and understanding the types of partnerships that are available to you will help you enter into the best business partnership agreement possible. You’ll be able to clearly define who is responsible for what, especially come tax time. 

Long-Term Strategies for Better Business Partnership Agreements

We’ve gone over some quick things you can do to improve the creation of your business partnership agreement. However, there are longer-term steps you can take to make sure you’re covering all your bases. 

Understanding Your Tax Responsibilities

With business partnerships come taxes and you want to be well informed on how taxes will be handled well before your taxes are officially filed. This will likely mean consulting with a professional tax accountant that specializes in business partnership tax filings so you know you’re filing correctly according to the structure of your agreement.

While you can do plenty of research on your own, it’s always best to consult with a tax professional. This way you have peace of mind in knowing you’ve filed everything correctly. In the case that you get audited, you’ll have years of accurate records and filings to fall back on. 

Obtain and Gather Copies of All Licenses and Permits

Drafting a business partnership and calling it a day doesn’t really get you to the finish line. There are a few additional licenses and permits that you’ll need to file to ensure you’re thoroughly managing your business. 

These can be things like:

  • State-specific business licenses
  • Business identification numbers
  • Industry-specific licenses or permits

Filing additional licenses and permits can help make your agreement that much more viable. In the case of an emergency, you won’t be caught without your ducks in a row. 

Make Sure You Have An Exit Plan

All good things come to an end. This includes business partnerships. Outlining an exit strategy from the beginning can ultimately save you lots of headaches down the road. 

In other words? How are you going to dissolve the business in case things went south, or you simply want out? An exit strategy clearly outlines who gets what as well as who’s responsible for any or all liabilities. 

How will the withdrawal process go in case a partner wants to exit? How much notice does the partnership need to get before proceeding with the exit process? What are partners allowed and not allowed to do after a partner exits the partnership? 

It’s questions like these that you want to consider when you’re outlining an exit process. Though you might think you don’t need one or that you’ll add one down the road, you want to start off on the right foot. Don’t let key details like your exit strategy get away from you by choosing to skip the process. 

Consider Insurance

Will your partnership opt for business insurance? There are tons of different insurance options you can go for that’ll protect your partnership in multiple ways. 

Is there life or health insurance to take into account? Part of creating a business partnership agreement is to plan for the unexpected. So you want to make sure you outline and have as many layers of protection as you can. Insurance, beyond your partnership agreements, can be one of those layers. 

Next Steps

A business partnership agreement should always be one of the first things on the table if you’re planning on forming a business with one or more people. Though in most cases it’s best to consult with a business attorney as you draw out your agreement, software like Bonsai can help you take the first step in drafting a partnership agreement as a small business.

As you probably already know, there are a lot of moving parts to successfully managing a business. You might need to learn to draft employment contracts as you onboard your first few employees. 

If that’s the case, you’ll want to dive into this guide to learn all about employment contracts. Drafting non-competes is also part of the business management process. It’s why we created this beginner-friendly guide that talks you through when and how to create non-competes. 

Know the difference between exempt and non-exempt employees? If you don’t and you’re planning on hiring, you’ll need this guide in your corner.  

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