A small business partnership agreement between companies and individuals in Colorado is a necessary document when starting a business with more than one partners. Having this important business partnership contract between two business partners can reduce the need for expensive litigation. It can also serve as a reminder between partners of their obligations to each other and to the business.
When creating a partnership, 48% of business partners fail to execute viable business partnership contracts or understand the contract format. This can lead thousands in litigation fees later.
A small business partnership contract (or the partnership agreement if you’re a multi-member LLC, or the partnership bylaws for corporations constitutes a binding contract that addresses defines each person’s rights and legal responsibilities to the business and each other. The contract also includes clauses that the obligations and legal authority for operating the business, both day-to-day and if another contract partner dies or there is a dissolution.
A common problem that occurs when looking for a business partner is that they do not tailor the business partnership contract to the reality of the day-to-day company operations. As a result, partners end up in heated disputes and costly litigation.
How to form a partnership?
When starting a business, failure to articulate your rights in the agreement or partnership bylaws can force you to defer to state business law statutes for the disputed result. If litigation arises, and the partnership contract does not have a viable remedy, the court will more than likely turn to the applicable Colorado statute as a result. Sometimes, state law results may not be what you had hoped for. As your business grows, so does the risk. It is up to you to reduce those risks now.
What is a Small Business Partnership Agreement?
Your small business partnership agreement should focus on protecting the rights of each partner. It should also clarify the role of each partner during the day-to-day operations. This applies to LLC’s and other types of business partnerships. A company partnership agreement also specifies what happens in the event of a dispute of termination of the partnership.
Governing Business Law for Partnership Agreement Between Companies
Most states have respective partnership laws and business law statutes. For example, Colorado uses the Revised Uniform Partnership Act addresses the concerns with contracts between business partners. It is critical that business owners understand the respective laws of their state and the advantages of a partnership before they enter into a business partner agreement.
More importantly, company owners and contract partners should consult with a business law attorney to fully understand their rights, rights to other partners and legal obligations to the business entity.
Creating a Partnership Agreement Between Companies: Virtually the same application of the law applies to a business partnership contract when creating partnership agreement between companies. The general partnership agreement must contain all of the relevant clauses to be effective.
General Small Business Partnership Agreement Contents
If you are presented with a business partnership for your signature, you should, at least, ensure that the following provisions are present in the contract format.
- Legal name of the partnership. Before entering into the contract, you should have at least formed a business name with the secretary of state.
- Partnership contributions. Matters that should be documented in the partnership agreement should include property brought to the business, individual loans to the business (supported by a signed promissory note,) what percentage each partner owns, etc.
- Allocation of profits, losses, and draws.
- Limitation on Authority. Ensure that your agreement provides for this occurrence.
- Who makes what decisions: Your contract should articulate the scope and limitation of authority, or what types of decisions need joint approval.
- Management duties under your agreement.
- Additional partners. A well-defined partnership agreement should articulate what needs to happen before new partners come into the company. This includes who has majority votes etc.
- What happens if one partner wants to leave? Your business partnership contract should cover this common issue.
Costly Mistakes and Pitfalls to Avoid With a Partnership Agreement Between Companies and Individuals
Failing to have an exit strategy. Many partners know that they should have a viable small business partnership agreement between the company and the individual partners. However, many make the mistake of not developing an exit strategy for when disputes occur or disagreements between partners arise. Most business partnership contracts will have a walk away clause or some may have a clause that allows one partner to buy out the other – a buy-out clause. These are all important partnership contract clauses that can minimize frustration and stress.
Developing an equal share of the partnership – 50/50: This is one of the most costly mistakes seen when drafting a contract between business partners. In Colorado, and in federal government contracting, someone should be in control of the business.
Business control in a general partnership can only be valid to the extent business partnership contracts cover it. The problem that can arise is that when partners disagree, then no one can make a decision for the business. Hence, deadlock. What happens then is that the company ends up spending more money on legal fees than what the company is making in revenues. As a result, the partnership suffers.
At the end of the day, you want to make sure that you have a valid small business partnership contract between company and individual. This can avoid expensive litigation cost and attorney fees.
If you are starting a business, call Our Colorado Business Law Firm and Partnership Agreement Lawyers for immediate help with your small business partnership, call our business lawyers at 1-866-601-5518. FREE INITIAL CONSULTATION.