How to Write a Business Partnership Contract

Experts say never to go into business with a friend. This is because business partnerships often involve a lot of money, which can turn small misunderstandings into lost friendships. Whether you establish a business partnership with a friend, associate or total stranger, the key to success is communication. Both of you (or all of you) must understand clearly what you expect of one another, how you will share responsibilities, how you will handle failure or success, and how you will distribute profits, the rewards of success.

Instructions

    • 1

      Assign rights to each of you. Decide how decisions will be made and how you will resolve differences of opinion. Agree on how profits will be distributed, including provisions for keeping some profit in the business.

    • 2

      Agree on how each partner will earn his rights. It's often best to write a formal job description--including provisions for vacation, sick days and medical leave--for each partner. If your partnership is simply about funding, then one partner does the work while the other provides a specific amount of money, working capital, and both share in the profits. If you're both active in the business, clearly define who does what or, if you have employees, who is responsible for each aspect of business operations. Establish chains of command. Determine how things will be done if one partner is absent. Leave nothing out; make sure that each task is assigned. All this will prevent one partner from stepping into another partner's person's bailiwick. Write all this down in a formal agreement and have each partner sign off on it.

    • 3

      Set a timeline. If there are ongoing projects in the establishment of the business-- renting a space, advertising, finding additional capital, etc.--set the dates by which each partner will complete his responsibilities. Also set a date for re-evaluating the terms of your agreement. Having an end date in sight, typically no more than five years away, helps motivate people to stick to a portion of the agreement they don't like as much as they had hoped.

    • 4

      Agree on penalties for default. Write down on paper exactly what happens if one person doesn't do his part. You have already clearly defined the roles and responsibilities of each partner. Now establish clear consequences if one partner fails to live up to his end of the bargain.

    • 5

      Write down the process for dispute resolution and a method for dissolution of the partnership, including how one partner can buy the other out and under what circumstances. This should be very specific, step by step and value neutral. Knowing how to get out if things aren't working out can save a friendship, or at least help you avoid an expensive legal battle.

Tips & Warnings

  • Once you've established your basic agreement, have a lawyer write up the actual document. A lawyer will think of things you didn't, and will know how to write the contract in clear and legally enforceable terms.
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References

  • "Small Business for Dummies"; Eric Tyson; 2007
  • "The E-Myth Revisited"; Michael Gerber; 1996
  • Photo Credit Comstock Images/Comstock/Getty Images

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