Legal News

06-Oct-2022

How To Write An Effective Business Partnership Agreement

A business partnership is a type of legal relationship that allows two or more individuals to combine their collective strengths, resources, and revenue streams to launch and operate a business. A business partnership agreement is a document that outlines the terms of this legal arrangement. It details how responsibilities are delegated, how profits and losses will be shared as well as what happens if one partner departs or there is some other change in circumstances. It can be used to establish a wide range of partnerships, from joint ventures to the co-ownership of a business. A partnership agreement can be used to outline the responsibilities of each partner, decide how profits will be distributed, decide how the partnership will be dissolved, and outline how disagreements will be resolved. 

Partnership agreements can be used for both businesses and personal partnerships, such as between landlords and tenants, roommates, or even spouses. An effective partnership agreement helps protect the interests of all parties involved. The document also makes it easier for any new partners that join the business at a later date. A well-drafted partnership agreement cuts down on the potential for misunderstandings and conflict between partners. Without one, there’s more risk that an unplanned exit by one partner could trigger unfortunate consequences for everyone else involved in the venture. Partners should not jump into business with someone they barely know without first creating a legally binding contract that covers all foreseeable eventualities and protects their mutual interests.

What are the important provisions in a business partnership agreement?

A partnership agreement is an all-encompassing legal contract that covers everything from how profits and losses will be shared to how authority and responsibility are delegated to how a departing partner is treated. What provisions you include in your partnership agreement will depend on your particular business needs. A few critical provisions that should be in every partnership agreement include: 

• Nature of the partnership and the parties involved - When did the partnership start, and who are the parties involved? 
• Management of the business - How will decisions be made regarding new product lines or services, expansion, or hiring of additional staff or contractors? 
• Distributions and buyouts - What happens if a partner wants to leave the partnership? What if one partner wants to buy out the others? What if one partner becomes unable to continue with full-time participation? 
• Exit or breakup provisions - What happens if things get ugly and there’s a falling out between partners? While litigation is always a last resort, you can specify how disputes between partners should be handled.

Sections you should always have in your BPA.

Nature of the partnership - This section outlines the nature of the partnership and explains how the partnership came to be. It also outlines the roles and responsibilities of each partner in the partnership. 

Management of the business - This section outlines how decisions will be made about new product lines or services, expansion, or hiring of additional staff or contractors. This section also outlines how profits and losses will be shared. 

Distributions and buyouts - This section outlines how a partner can be bought out or what happens if one partner wants to leave the partnership. This section also outlines how a departing partner is treated. You’ll also want to outline the distribution schedule for any buyouts. 

Exit or breakup provisions - This section outlines what happens if things get ugly and there’s a falling out between partners. This section also outlines how disputes between partners should be handled.

Departing partner protections

A lot of partnership agreements include “departing partner protections.” This is a provision that outlines specific actions a departing partner must take before he or she can leave the partnership. For example, a departing partner could be required to give the other partners 90 days’ notice before departing the partnership. This notice would allow the other partners to seek a new partner and/or raise additional funds if necessary. A departing partner could also be required to sell his or her equity stake back to the partnership for some predetermined amount. This would provide the remaining partners with liquidity that would help mitigate the risk of financing a buyout from a new investor. A partnership agreement should also outline what happens to the departing partner’s intellectual property and other assets.

No-fault exit provisions

A no-fault exit provision allows a partner to voluntarily exit the partnership at any time, with no financial penalties and no cause. These provisions are common in business partnerships that involve family members. For example, if a husband and wife go into business together, they could agree that either one could leave the partnership at any time, with no penalties. This is generally easier said than done and better in theory than practice. In other words, it’s very difficult for two spouses to agree that neither one is at fault for a divorce. It would be more realistic for a couple to agree that neither one can leave the partnership if one of them is under investigation by the state or federal government.

Equity buyout provisions

An equity buyout provision outlines the requirements that a partner must meet before they can receive a buyout. It’s important to have a detailed equity buyout provision in place if you’re thinking of selling your business. This will help you to identify what factors will be taken into account when determining the price of the business. It’s also a good idea to include a

non-disclosure agreement in this agreement so that the details of the buyout process aren’t made public. For example, a departing partner might have to show that they’ve repaid a loan that they received or have fulfilled some other obligation to the partnership. Or they might have to have been a partner in the business for a predetermined length of time, like five years. These are just a couple of examples. An equity buyout provision might also require that the departing partner repay some part of the money that was invested in the partnership. Or it might require that the departing partner contribute some amount of cash to bail out the remaining partners.

Conclusion

A business partnership agreement is an all-encompassing legal contract that covers everything from how profits and losses will be shared to how authority and responsibility are delegated to how a departing partner is treated. What provisions you include in your partnership agreement will depend on your particular business needs. A few critical provisions that should be in every partnership agreement include the nature of the partnership and the parties involved, management of the business, how profits and losses will be shared, how authority and responsibility are delegated, and what happens if a partner wants to leave the partnership. A partnership agreement should also outline what happens to the assets of a departing partner and what happens if things get ugly and there’s a falling out between partners. It’s also advisable to outline how you will settle disputes between partners and how you will handle any issues that might come up between partners, such as breach of contract, and how partners can be forced out if they are not performing their duties as outlined in the agreement.