When going into business with someone, there is a lot to figure out. There are various advantages of having a partner, but it also potentially creates issues. Having a partnership agreement helps to work out a number of things.
A partnership agreement puts into writing important aspects of the partnership as well as business operations. A thoroughly written one has numerous benefits.
Outlines duties of each partner
One of the benefits of forming a partnership is that each of you can focus on your individual strengths. However, if you do not clarify the jobs and duties of each partner, this can lead to confusion and arguments. A business contract can dictate the specific roles of each partner so there are no questions or disagreements.
Specifies ownership percentage and division of profits
According to the U.S. Chamber of Commerce, not all partnerships are 50/50. Even those in which each partner owns 50% of the business, the contributions may not be equal. One partner may contribute more financially while the other is in charge of actually running the business.
Outlining the percentage of ownership and specifying how the division of profits and losses will work are important aspects of a partnership agreement. This helps to dramatically minimize the chances of conflicts and legal squabbles down the line.
In general, an agreement cuts down on many potential conflicts. However, a good partnership agreement also outlines how the partners will resolve conflicts if they arise. The Harvard Law School Program on Negotiation discusses the various types of resolution methods partners may choose. To avoid the costs and time involved with litigation, some partners may choose to resolve disputes via mediation or arbitration. Both involve a neutral third party, and they are less expensive and combative than litigation.