Questions to Ask for Partnership Agreement
When drafting this important agreement as part of the process of forming a legal partnership, it's important to consider the issues that could come up.3 min read
Wondering what questions to ask for partnership agreement? When drafting this important agreement as part of the process of forming a legal partnership, it's important to consider the issues that could come up, as well as the details that are most important to all partners and should be included.
The first question to ask when drafting a partnership is agreement is what each partner will contribute to the business. Contributions could include:
- Benefits, insurance, or other perks.
- Equipment and tools.
- Intellectual property.
- Professional contacts and network.
Some of the questions to ask when considering the responsibilities of the partners include:
- Who will be responsible for handling what tasks?
- How will the responsibilities and roles be split among the partners?
- Which partners will be over the management duties of the business?
Ownership and Compensation
It's also important to consider how draws against profits will be determined, as well as how those in the partnership will be paid in terms of a salary. Make sure to address the portion of the profits that will be withheld and reinvested in the business. Certain life events can impact an individual partner's ability to contribute productively to the business. For example, a serious illness impacting the partner or a family member, a disability, or a death can all cause a major disruption, so it's important to consider how these events will be addressed.
Figuring out a method for deciding on the percentage of ownership for each partner is important as well. Consider these questions:
- How will the partnership allocate losses?
- How will the partnership apportion any profits?
Many companies offer perks, so the agreement should outline how those will be assigned and distributed. Examples of perks include theater and/or stadium seats, cars, tickets to events, etc. Consider what other benefits the company will provide to the partners, as well as to any employees who may be hired in the future. Benefits may include sick time, holiday pay, and paid time off for vacations.
Another question that may arise is how a long a partner must be absent before the agreement should be renegotiated. For example, if a partner becomes ill and is unable to productively work with the other partners, what period of time would necessitate the other partners to renegotiate their agreement?
Keeping accurate and complete records is a critical business task in any partnership. Consider these questions when drafting the financial recordkeeping component of the agreement:
- Who is responsible for managing the financial books and records?
- Which financial documents and statements will be provided to the partners?
Restrictions on Partners
Do you plan to restrict partners from engaging in any other business activities while they are part of this agreement? Consider whether you want to include a section that forbids partners from engaging in any activities with direct competitors of the partnership or those that would be considered conflicts of interest.
Make sure to include information in the agreement about buying out a partner or the opportunity for a partner to sell his ownership interest in the business. If a partner chooses to exit the business, can the company purchase back that partner's shares? Could a partner who chooses not to serve in the partner role anymore still remain on as an investor?
Disputes often arise in partnerships, so you need to have a method in place to deal with those disputes and resolve them. You might want to decide in advance whether you will use some type of alternative method for resolving disputes, such as mediation or arbitration, instead of litigation. If you do choose to include this, outline the method for selecting a mediator or arbitrator.
If a partner dies, what will happen to the assets owned by the business? If a partner elects to leave the business, could he receive the same payment for his ownership interest if he chooses to work with a competitor? Consider whether you want to include any approval requirements or restrictions around a partner selling his or her ownership interest to a third party.