Anytime you start a business with one or more individuals, you must anticipate possible disagreements. It is difficult to imagine that you and your partner will see eye-to-eye on all aspects of managing the business, determining compensation and making key decisions for your company’s future.
Unfortunately, a serious business dispute can cost your firm significant resources and distract employees from essential business functions. It also produces the ultimate risk of business dissolution. How can business owners minimize the chances of a partnership dispute?
A thorough partnership agreement is one of the best ways to avoid confusion and unnecessary dispute between partners. It allows you to determine key aspects of your business’s day-to-day management and future, including:
Compensation for each partner
How company profits or debts will be handled
How you will resolve conflicts
Each partner’s authority and responsibilities
How to bring in additional partners
How partners can exit the company
What happens if a partner becomes incapacitated or dies
If you do not determine the above information in a legal document, each partner is free to make binding decisions on behalf of the firm without anyone else’s knowledge or consent. This can create chaos within the company and lead to disastrous decisions that jeopardize the financial health and future of your firm. Failure to create a partnership agreement can also lead to serious conflicts with no clear path for resolution.
In addition to providing a framework for your regular firm management, a partnership agreement provides you with legal authority if your partner breaches its terms. This can be very helpful if your partner wrongly assumes debt, takes more compensation than they deserve or tries to bring in a new partner without your permission.
A partnership agreement may not be able to protect against all eventualities, but it can provide some protection to keep your company out of court and focused on growth.
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