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Partnership agreements: protection from partner divorce

Choosing a compatible business partner is essential to a happy, healthy small business. Unfortunately, it is not easy to find the right one. People bulk when they hear that 50 percent of marriages end in divorce, but the success rate of business partnerships is even worse. Approximately 70 percent of business partnerships end in “partner divorce.”

Don’t let these statistics scare you. There is still a chance that you and your business partner will have a successful business relationship. However, keep these statistics in mind, and plan for the worst. As you develop your business plan, consider creating a formal partnership agreement.

What is a partnership agreement?

A partnership agreement is a legal contract that lays out the expected conduct of each partner. It clarifies each partner’s responsibilities, what happens if a partner enters or leaves the business, guidelines for how the business is run and how profits/losses are distributed.

What can an agreement decide?

Partnership agreements can determine a number of important aspects of your business including:

  • How much each partner contributes to the firm
  • How profits and losses are divided
  • What each partner has authority over
  • How business decisions are made
  • Key duties that each partner is in charge of
  • How partners enter or leave the business
  • How disputes are settled

Why is an agreement necessary?

Everyone has different expectations about the role of work in their lives, and how work matters should be handled. Clearly laying out expectations before you enter into a work relationship makes sure that both people are on the same track.

If you do not pre-determine how the relationship will go, you could end up with one partner pulling more than their fair share of the weight, making unwise business decisions without your knowledge or taking more profits than they are entitled to.

Many otherwise successful businesses fall apart when business partners are at odds. In-fighting consumes the energy of each partner and prevents them from focusing on the business’ success. If the partnership dissolves without a buyout agreement, you and your partner can end up in a messy business “divorce” that consumes both time and substantial assets.

If you are thinking of entering into a business partnership, contact an attorney who can help you create a partnership agreement that will ease the management efforts of your business.

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