Sole Proprietorship and Partner Agreements

Make sure your contracts are solid when starting a business.

The process of establishing a business can be done alone or with others. As an sole proprietor, the responsibilities of the operation of a business rests on one individual. However, when entering into business with others, it is always good to have a partnership agreement. Yet, whether in business solely or with partners, the goals and consequences for decisions made are similar.



A partnership agreement can be as simple as a brief conversation and handshake or as extensive as seemingly endless negotiating involving legal representations for all involved parties. It is best to get all conditions of a partnership in writing. There are several issues every written partnership agreement should address.

Introduction

Partnerships can be formed between individuals, companies or a combination of the two. Given this, the Introduction section should clearly denote which parties are entering into agreement. Additionally, the purpose of the formation of the partnership should be explained herein. The purpose could be summed up in a clause as simple as, "Partners desire to enter into a partnership agreement as the most advantageous business form for their mutual purposes."

Classification and Performance

Sole proprietors are understood to be responsible for all aspects of operating a business. This is not so when multiple owners are involved. The classification of a partner that may be involved with a business includes general, advisory or financial. Thus, contained within this section a title which clearly expresses the classification of each partner along with their accompanying responsibilities.

A general partner is most often involved in the day-to-day activities of operating a business. An advisory partner, on the other hand, may limit their involvement to consulting the other partner(s) for the purpose of providing guidance and direction. Conversely, a financial partner--often referred to as a "silent" partner--only provides financial backing for a company in exchange for a percentage of profits.

Contributions

Sole proprietors are expected to provide their own resources. When partnering, it is common for involved parties to pool together resources such as equipment, office space and funding for the attainment of their mutual goals. Such resources, if any, are listed in this section along with the contributing party's name and expected date by which said resources will be made available.

Profits and Losses

All profits and losses are the taken by sole proprietors as there is no one else to divide either with. In a partnership agreement, however, the responsibility for all expenses and entitlement to income generated by the partnership is listed in this section of the agreement. To simplify the understanding between parties, this issue is most often expressed in percentage. For example, a partnership between two individuals may list each party as being 50 percent responsible for all debt incurred and entitled to 50 percent of all profits gained.

Term

The length of time in which the partnership is to remain in effect is outlined in this section. Save the partnership is a joint-venture, it is understood that the time a sole proprietorship or partnership is to remain in business is indefinite.

Also, contained herein are the resulting actions should the partnership be terminated by reasons such as a partner selling his or her share, the inability for one or more parties to fulfill their responsibilities as assigned or death of a partner. According to Entrepreneur, having such information contained within a partnership agreement is the best preventative for unpleasant parting of ways between involved parties should a partnership dissolve.

References

• Entrepreneur Magazine: Partnership