Creating a Partnership Agreement

It might be tempting to start a business with friends or family members and think that you don't need anything in writing because you know each other and believe that that you all want the same things from your new venture, but what happens if you do start to have minor disagreements about how the business is being run? And what happens if those minor disagreements become major disputes? Having a partnership agreement in place means that you have a referral point to try and sort things out before they get out of hand.

An agreement will allow you to establish a working relationship in a way that suits you, your partners and the business. It will give everyone a defined role and responsibilities and should deal with the process of what does happen if everyone does falls out.

As there is no "one size fits all" agreement, here are some of the key areas that you should consider when you have an agreement drawn up:

• Name of the partnership.
You need to decide what you are going to call your partnership. Will it be your surnames or simply a random word (s) that means something to you or sums up what your business is about, or you simply like the sound of it?
Check with Companies house to make sure that the name is not in use to avoid any problems later on.

• Contributions to the partnership.
It's crucial that you and your partners work out and record who's going to contribute what to the business. It could be cash, property, services or even goodwill if you are expanding an existing business. Decide exactly what percentage ownership everyone will have and do all of this before the business starts to trade
Disagreements over contributions have blighted many promising businesses.

• Allocation of profits, losses and draws.
Your partnership agreement needs to detail the profit distribution arrangement. This is all about how the profits of the company are going to be distributed and when. You need to consider if the profits and losses will be allocated in proportion to a partner's percentage interest in the business? You and your partners may have different ideas about how the money should be divided up and distributed, and as each of you may have different financial needs this is an area to which you should pay particular attention.

• Partners' authority.
Without an agreement to the contrary, any partner can enter the partnership into a contract without the consent of the other partners. If you want one or all of the partners to obtain the others' consent before entering into any contractual arrangements, you must make this clear in your partnership agreement.

• Partnership decision-making.
This can be quite a difficult area for partnerships, especially in the beginning when everyone involved wants to have their say about everything. Unanimous votes are all well and good but they can impede business development. You could try a system where minor, everyday decisions are made by one partner but a unanimous vote is required for major decisions. There is no right and wrong way but it's an issue that needs careful consideration when you are setting up your business. You don't want to tie the business up in such a complicated decision making process that nothing actually ever gets decided.

• Management duties.
Being your own boss gives you a great sense of freedom but once you start working with someone else then you will probably need to have some guidelines in place about your respective roles within the business. For example, who will keep the books? Who will deal with customers? Supervise employees? Negotiate with suppliers? Think through the management needs of your partnership and be sure you've got everything covered.

• Admitting new partners.
Eventually, you may want to expand the business and bring in new partners. Agreeing on a procedure for admitting new partners will make your lives a lot easier when this issue comes up.

• Withdrawal or death of a partner.
At least as important as the rules for admitting new partners to the business are the rules for handling the departure of a partner. You should set up a reasonable buyout scheme in your partnership agreement.

• Resolving disputes.
If you and your partners do become deadlocked on an issue would you really want to go straight to court? Although you probably can't ever imagine reaching this situation it's a good idea to try and agree in advance a procedure for dealing with disputes. For example bringing in a mediator or going to arbitration.

It may seem daunting to draw up a Partnership Agreement and you may feel uncomfortable talking about some of these issues with someone who may be close to you but ultimately having an agreement will help the business get off to a smooth start as everyone will understand what is required of them from day one.