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Home  > Article

Putting It On Paper

By Laura Sweeney

Everyone enters into a business with good intentions, but conflicts do arise. Covering these bases will help you and your partners create a healthy working relationship.

Business partnerships have been compared to marriages - they can be that intense.

Many business partners have compared their partnership to a marriage - it's that intense. Don't rush into such a serious commitment; take the time to do all of the proper research and documentation. Only some states require a legal agreement between partners, but you should always put the details of your arrangement in writing, no matter how well you and your partner know each other. While everyone enters into a business with good intentions, conflicts do arise. Covering the following bases will help you and your partners create a healthy working relationship.

Are you right for each other?
If you and your business partner can't agree on the following issues, you shouldn't be business partners.

  • Why do you want to partner? For extra capital? Expertise? Companionship?
  • What are the focus and philosophy of the business?
  • What are the roles and duties of each partner?
  • How much will each partner invest?
  • Will profits be fed back into the business or will the partners take a cut?
  • How will the partners be compensated?
  • How long will the partnership last?
  • How will assets be distributed if one partner wants out?
  • What if a partner becomes too ill to work or dies?
  • Are you both committed to working long hours?
  • Is either one of you dependent on a steady paycheck?
  • Do you share similar values? How will you treat your employees? What are your financial ethics?

Full Disclosure

Make sure you know all there is to know about your business partner before you make your partnership official. Both of you should share all of the following important documents.

  • Tax returns from last few years to verify each partner's earnings
  • Credit reports to show outstanding debts and payment history
  • Public records to determine whether any partner is facing criminal charges
  • Current personal financial statements to show net worth, should personal guarantees be required to secure business loans
  • Tax returns and financial statements from any previous failed or terminated businesses

Put it in writing

Put your mind at ease by recording the details of your partnership in a contract. If a conflict arises, you'll already know how to handle it. A contract should cover all of the contingencies that may come up in starting, operating, and terminating a business, including these elements:

  • Division of power and responsibilities
  • Compensation arrangements, including the basis and method for determining salaries, bonuses, and equity
  • Investment, including how much money each partner will invest initially and what will happen if the business needs more capital
  • Controls on who can withdraw money
  • A clause that allows for removing another partner from the business if he/she commits wrongdoing
  • Buy/sell provisions that stipulate the amount paid to a partner who withdraws from the business
  • Non-compete clause that restricts a withdrawing partner from competing with the business for a set period of time
  • A provision to prevent partners from getting involved with another business activity that might cause conflict with the business

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