{"id":8312,"date":"2021-10-04T13:07:36","date_gmt":"2021-10-04T13:07:36","guid":{"rendered":"https:\/\/ownrblog-preprod.go-vip.net\/?p=8312"},"modified":"2023-12-07T13:38:07","modified_gmt":"2023-12-07T13:38:07","slug":"partnership-agreement","status":"publish","type":"post","link":"https:\/\/www.ownr.co\/blog\/partnership-agreement\/","title":{"rendered":"What is a Partnership Agreement?"},"content":{"rendered":"

As an entrepreneur, doing business alone can make the road seem hard and lonely. Having a second (third or fourth) set of eyes or a person to run things by can make your business easier and more fun. That\u2019s why choosing a partnership <\/span>business structure<\/span><\/a> could be the choice for you.<\/span><\/p>\n

However, it\u2019s estimated that <\/span>80 per cent<\/span><\/a> of partnerships will fall apart, so it\u2019s important you protect yourself before that happens. That\u2019s where a partnership agreement comes into play. It can help you protect you and your business in the long run, should things not work out.<\/span><\/p>\n

What is the main purpose of a partnership agreement?<\/span><\/h2>\n

Partnerships can be complex, especially in Canada, where they’re two or more sole proprietors who have banded together. Partnership agreements can help mitigate their complexity by ironing out the details of the business arrangement.<\/span><\/p>\n

The agreement is a written document between the two or more parties undertaking that business venture together. It outlines the rules, responsibilities, and relationship between the individuals participating in the partnership.<\/span><\/p>\n

Importance of a partnership agreement<\/span><\/h3>\n

The primary importance of a partnership agreement is to help resolve conflicts before they arise. By clearly outlining the responsibilities and relationship, an agreement can help fend off disputes over details like ownership, roles, and termination of the arrangement. In the long run, this can help save everyone involved money and avoid lengthy court cases by making dispute resolution simpler.<\/span><\/p>\n

Benefits of a partnership agreement<\/span><\/h2>\n

Business partnership agreements have some serious benefits if you’re planning to go into business with someone else. It helps you establish the business officially, and reduce the potential for issues in the future.<\/span><\/p>\n

Establishing decision-making process<\/span><\/h3>\n

It’s not uncommon for disagreements to arise in a partnership, so having an agreement right off the bat can help establish who has what say when making a decision. Even if you have a 50\/50 partnership where each partner has an equal vote, a partnership can establish the process for a third-party to provide a swaying vote. But partnerships don’t have to be 50\/50, it can be established on whatever grounds the partnership agreement lays out.<\/span><\/p>\n

Reduce money-related disputes<\/span><\/h3>\n

Most partnerships see an equal share of profits and liabilities to each partner, but this division could lead to an issue where one partner has committed more time or money than the others. Your arrangement doesn’t have to adhere to the status quo, your partnership agreement can stipulate a different divide based on specific contributions.<\/span><\/p>\n

A partnership agreement plays an important role in helping to combat these money-related disputes before they happen by establishing boundaries and rewards based on contribution. Plus, they make sure you <\/span>get paid<\/span><\/a>. That same agreement can also serve to limit the liability of partners based on their contributions as well.<\/span><\/p>\n

Avoid legal battles<\/span><\/h3>\n

Lawyers are expensive, especially when something goes to court. While the best partnership plans are drawn up by lawyers, thus requiring a fee, that cost is likely to be significantly less than if you ended up in a court battle over something that could have been outlined with a good partnership agreement.<\/span><\/p>\n

Not only can it outline the business relationships and awards, a partnership agreement can stipulate cheaper alternative resolutions for disputes, like mediation, negotiation, or arbitration. Saving you both time and money.<\/span><\/p>\n

Create an entry plan<\/span><\/h3>\n

Without setting out an entry plan in a partnership agreement, any partner could theoretically be added to a business. By adding an entry plan in the initial partnership agreement, you can protect the partnership from unwanted prospective partners.<\/span><\/p>\n

It doesn’t just outline how new partners are onboarded, but how much of a stake in the company they\u2019re entitled to, what they have to put forward, and what kind of say a new partner has in the overall business.<\/span><\/p>\n

Set up an exit plan<\/span><\/h3>\n

With no agreement in place, any partner can terminate or dissolve the partnership at any time\u2014no real warning needed. But the right partnership agreement helps define an exit strategy for each of the outgoing partners. An exit plan can outline circumstances, processes, and other important information. It can also establish an overall process in the event all the partners agree to end the partnership.\u00a0<\/span><\/p>\n

Disadvantages of a partnership agreement<\/span><\/h2>\n

Creating a partnership agreement doesn\u2019t mean your business relationship will be all rosy. While signing one protects you and helps firm up the relationship between partners, it also has some drawbacks.<\/span><\/p>\n

Increased liability<\/span><\/h3>\n

Not only do all partners share in the business profits and losses, but they also have increased liability. You are no longer just responsible for your own actions, but also those of your partners\u2019. That means that if one of you gets sued, you could be at risk.<\/span><\/p>\n

Less autonomy<\/span><\/h3>\n

When you’re a solo operator, you get to make all the decisions. But with a partner, you lose the ability to make all the decisions for the business\u2014there will be compromise and concessions. Before you sign a partnership agreement, you want to make sure that you can live with that.<\/span><\/p>\n

Elements of a partnership agreement<\/span><\/h2>\n

When you set up your partnership agreement template, there are certain elements you’ll want to make sure you include. Everything from your ownership percentage to the length of the partnership can be included in the agreement\u2014this can make the entire partnership easier in the long run.\u00a0<\/span><\/p>\n

Ownership percentage<\/span><\/h3>\n

One of the most important things that a partnership agreement outlines is who owns what. While 50-50 business partnerships seem like the default, there are several factors to consider, including:<\/span><\/p>\n