Partnership agreements: Spell it out
   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.
   The chemistry. The most crucial element of any deal is compatible chemistry between the parties involved because they will be in close contact.
    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.
   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.
   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.
   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.
   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.
    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.
    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.
   Published June 14, 1999
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