Why is a Business Partnership Agreement so Important?

Why is a Business Partnership Agreement so Important?

Anyone who is a fan of HGTV’s Windy City Rehab has likely seen the drama play out this season. From a legal perspective, there are so many aspects of this hit TV show to dissect, and they’re really important. As fans watched the assumedly legal partnership between the two hosts fall apart this season it brings up so many considerations for starting a partnership when you’re looking at it through a legal lens.

When you start your business partnership, everyone is excited! As you should be, you’re embarking on a new adventure with someone you trust. Often, optimism gets the best of new partnerships and the partners think their business plan is bulletproof…that failure happens to other people and will never happen to them. While one should hope of the best, one should also safeguard against the worst.

Important things to consider:

How will profits and loss be split?

It is common for one person to bring the industry knowledge and the other to provide the capital to get the business off the ground. Partner 1, who provided the industry knowledge and works in the business day-in and day-out may think they are entitled to 50% or more of the profits because they’re running the business. Partner 2, who provided the capital but does not work in the business, may believe they’re entitled to 50% or more of the profits because they provided the funding to make the business a reality. This can get messy.

If not discussed, it could lead to problems and resentment as the business continues to grow. It is much easier to create a proper partnership agreement that explains that profits will be split 50/50, or profits will be split X way, until Partner 2 recoups their investment, and then profits will be split 50/50. These profit and loss agreements and rules depend upon which entity the business is, but it is always important to talk to your business owners about how everyone envisions these things working out, so they aren’t a problem when they inevitably come up.

What happens if the business needs an infusion of capital?

If the business needs an infusion of capital to keep running, where is it going to come from? Will the business take out a loan or line of credit? Will the owners put more of their own money in? If the owners do put their own money in will it be paid back? Will all owners put in the same amount of capital? What if one owner can put in the required capital but the other owner cannot?

Those are a lot of questions to consider while reading a blog, likely under no stress to make a decision about any of these scenarios. Add in the layer of stress that exists when these decisions do need to be made, and it’s a much more difficult conversation for business partners to have as opposed to deciding on these things ahead of time.

What’s the solution?

All of these scenarios require business partners to be on the same page. It is best to have these things agreed upon before the need arises, to both relieve stress and be able to shift focus to solving the problem at hand because the logistics have already been decided ahead of time.

Having a clear business plan laid out ahead of time is key to preventing problems down the line. Click here to learn more about business plans.

Key Takeaways

  • All of these scenarios require your business partners/owners to be on the same page. It is best to have these things agreed upon before the need arises to relieve stress.
  • It is always easier to hammer out these details at the beginning of the relationship and then reference the agreement when the need arises. This allows for all involved to get the needed professional advice (legal, tax/accounting, etc)
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