Five Must-Have General Partnership Agreements
Your business partnership should include the five agreements listed below. All general partnership agreements should be in writing and signed by each partner. Additional agreements may be needed.
Buy/Sell Agreement
A Buy/Sell Agreement, (sometimes referred to as a “Business Will”) is a prearranged agreement that determines the outcome of the business if the partnership is severed. You should think of this agreement as a business version of the prenuptial agreement.
You and your partner will need to determine what stipulations are placed within the agreement. For example, what will happen if one of you should die or become unable to play an active role in the business? What if you and your partner are no longer able to work with each other due to, shall we say, a difference in opinions? The Buy/Sell Agreement should answer these questions and others.
Normally, either party can offer to “buy the other party out”. Meaning, Partner A can offer Partner B a sum of money in exchange for Partner B’s share in the company. If Partner B refuses that offer, Partner B has the right to purchase Partner A’s share in the amount equal to Partner A’s original offer.
Let me put that in plain English. Let’s assume you and me are partners. I say, “Hey, I’ll give you $100 for 100% of your shares (ownership) in our awesome company.” You say, “haha. Absolutely not! Our company is awesome. But since you offered me a $100, how about I offer YOU $100 for 100% of YOUR shares in our awesome company?” In many cases, a Buy/Sell would dictate that I would have to accept your offer.
Why would any partnership include that type of stipulation in their Buy/Sell Agreement? The reason is to avoid low-ball offers as in the example above. This deters me from offering you $100 because you will just turn around and take my shares for $100. This promotes fair and market value offers.
I bring this up because it is important for you to understand all of the ins and outs of this agreement before signing. Do not have your partner draw up the agreement and then blindly sign. You both need to discuss what stipulations are in place.
You general partnership agreement is likely to include:
– A list of events that would cause a buyout to occur.
– A list of parties allowed to purchase shares belonging to the departing partner, if any.
– Criteria to the buyout process including, price, offers, counter offers, and time period.
Life Insurance Policies
Each partner should have a life insurance policy that is held by your company. I will repeat that – each policy needs to be held by your company. This is to ensure that the proper proceeds are submitted to the business, should a death occur.
In each policy there will be a pre-agreed amount that is to be paid to your estate (family, friends, etc). The remaining amount is to be paid to the company.
These policies should be updated periodically, especially as your business grows. You will want the policy to reflect the size of your business.
Money Decisions
You need to determine what financial decisions can be made with and without the other partner’s consent.
For example, you may decide that each partner may make purchases up to $500 without approval from the other. However, for purchases over $500 both partners must agree to the purchase.
This removes a lot of the emotion when it comes to purchasing because each party is aware of the arrangement. Allowing each partner to make purchases without consent from the other can lead to an increase in productivity. Could you imagine having to get approval from your partner to buy a pack of pens for $5.95? This agreement also can deter impulse and unnecessary spending. You are less likely to purchase the fancy office chair if you have to get your partner’s approval, for example.
Profit Distribution Agreement
Profits (the money left over after expenses are paid) can go three places: to you, your partner, or back to the company. Profits reinvested into the company can be used to hire more people, purchase supplies, create a savings account, etc. You and your partner will need to determine the percentage of profits that go into each category. Let’s assume that you and your partner decide to split the profits evenly and reinvest a percentage to the company. After some discussion you both decide that 40% of the profits go to you, 40% goes to your partner, and 20% is reinvested back into the company. Great! Now everyone is clear what is happening with the profits, but there is more to discuss.
How often should these profits be paid out? You can choose any frequency you like. Monthly or quarterly payouts are popular options. You will want to pay out profits before taxes are due.
Speaking of taxes, here’s a little reminder! Let’s say you and your partner collect profits annually. Last year the company made $100,000 in profit. $40,000 goes to you, $40,000 goes to your partner and $20,000 goes back to the company. Come tax time though, you will be taxed not only on your collected profits, but the total profits. This means each partner would be paying taxes on $50,000, not $40,000 ($20,000 of company profits split between the two of you). Keep this in mind when setting aside money for taxes.
Personal Business Expenses
Create an expense account for each individual. The expense accounts should be created with the individuals role in mind.
If you only use your car for business once a month, your gas allowance should reflect that. Similarly, if your partner is driving all over town getting new clients, his/her gas allowance should be greater. Make a detailed list of business expenses and create a budget you can stick to.
Review
Many of these forms can be obtained through U.S. Legal Forms. You and your business partner should discuss the following items and create written and signed documents for each.
1. Buy/Sell Agreement
2. Life Insurance Policies
3. Money Decisions
4. Profit Distribution Agreement
5. Personal Business Expenses
