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Partnership agreements: Spell it out |
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While entrepreneurs have the freedom to make their own
decisions, they often deal with a partner - either an individual or an
organization - for business purposes. These partnerships may be spelled out in
shareholder agreements, if shares are being acquired, or take the form of
strategic alliances between separate legal entities. Here are some issues to
ponder before entering into any pact. |
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The chemistry. The most crucial element of any deal is
compatible chemistry between the parties involved because they will be in close
contact. |
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If the relationship turns turbulent, then any financial gain
from the partnership may be offset by the ensuing mental anguish. Great
chemistry, on the other hand, will allow you and your partner to work in a
positive environment, where ideas are generated and enthusiasm is
abundant. |
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The contract. Once you find a suitable business
partner, the question arises of whether you should have a legal partnership or
shareholder agreement in place. There are different opinions on the topic. |
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Some believe that no joint venture should proceed unless
there is an agreement in place that has been reviewed and approved by lawyers
for all parties. Most shareholder agreements are living entities that are
routinely amended with the consent of both parties. In many cases, the only
time the parties refer to the agreement is if they are unhappy and want to bail
out, are planning to take legal action, need to check a profit-sharing formula
or a partner has passed away. |
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Another option is to draw up a simple letter of understanding
between the parties. Once the partnership has been in force for a set length of
time, say a year, then lawyers can draw up a more formal deal. This option has
the benefit of keeping the process simple and allows the formal legal
agreements to include amendments that may have resulted from running the
venture. It can also reduce costs. |
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In most cases, both parties know at a very early stage
whether or not the partnership will work out. If elements have gone awry, the
partners can agree to part company without referring to lengthy legal
agreements that define their rights. While a simple letter of understanding has
significant benefits, the major drawback is that if the partnership becomes
rancorous or breaks up, or one of the partners proves to be dishonourable, a
simple letter of understanding may provide insufficient protection. |
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A partnership pact should contain the following:
- The purpose of the enterprise and the length of the
agreement.
- A breakdown of money issues, including how much each partner is
contributing, how much income each partner draws and when, how and when losses
are paid and definitions for terms such as salaries and benefits.
- An understanding of what's expected from each partner and how
one can leave if he or she decides the deal should be dismantled. The key
elements to be determined here are ownership of customers and trademarks,
valuation of the partnership if someone leaves, provisions - usually by way of
insurance - if a partner dies or becomes disabled, reporting of tax
liabilities, the role of spouses in the business and any other elements that
may be unique to the venture.
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The philosophy. The other major component of any
partnership is that all parties have a clearly defined culture and philosophy
for the enterprise. For example, if one party believes that the business should
be closed on Sunday and the other believes that is a prime business day to he
open, it's likely the venture will run into problems. |
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Published June 14, 1999 |
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