While certainly rewarding, the road to owning your small business can be a lonely one. Small business owners often choose a sole proprietor business structure when starting up. Over time, you may realize that greater rewards may result from forming a business partnership with another individual or group. In fact, partnerships offer more freedom for business owners with shared business tasks and the potential to earn greater profits.

How do you create a winning business partnership? First, for a partnership to be successful, all parties involved must agree on the same strategic direction of the company. Most importantly, a strong partnership is built on an open communicating relationship.

Many small businesses that go the partnership route look to create a partnership agreement. It is simple to set up a partnership because no legal documents are needed. While partnerships are often an oral agreement between two or more parties, potential problems can be averted down the road by drawing up a legal partnership agreement.

While you’re not legally required to draft a written partnership agreement, doing so is important for several reasons. First, a partnership agreement outlines each partner’s responsibilities and the essential terms of the contract. Also, if there’s a conflict among the partners, a written agreement will help resolve the problem.

To be a true agreement, everyone involved must agree to the terms. You and your partners can agree on anything you want or deem necessary as part of your contract. However, at a minimum it should include:

1. Nature and purpose of the partnership. This guarantees that partners will not deviate from the essential purpose of the business.
2. Capital contributions of each partner. This ensures that no one can dispute a partner’s capital contribution to the business. The contract should also account for other non-cash contributions such as goods, services, or time.
3. Profit and loss allocation. Normally a partnership allocates profits and losses equally, but this isn’t always the case.
4. Authority of each partner. The contract should determine which partner or partners will run the partnership on a daily basis, how the duties will be divided, and how decisions will be made.
5. How to admit new partners. Most agreements require a unanimous vote to admit new partners.
6. A course of action in case a partner dies. Normally, when one partner dies the partnership is automatically dissolved and liquidated. You don’t have to accept this process, however; it’s your agreement, and you can do what you want.
7. How to buy out a partner’s share. The contract should dictate which circumstances — such as death, divorce, or illegal activity — require the partnership to buy out a partner’s share in the business and how to execute the buyout.
8. Signature authority on partnership bank accounts. You may allow each partner to sign on behalf of the whole partnership, or you may require all partners to sign all checks.
9. Conflict resolution. There may be times when you simply cannot resolve a dispute. The contract may allow partners to hire a mediator or to submit the problem to binding arbitration instead of pursuing traditional legal action.

For more information, go to: http://www.smallbusinessnotes.com/operating/legal/samplepartnership.html

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