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Don’t fall victim to these common partnership contract mistakes

On Behalf of | Sep 29, 2020 | Firm News |

Forming a new partnership is it exciting time where you probably want to focus mostly on the potential and possibility for financial gain and career success. Don’t let your enthusiasm run away with you.

Both you and your partner could feel so excited about your upcoming partnership that you make questionable decisions during this early and critical stage of your partnership. There are certain mistakes that you need to avoid when drafting your partnership agreement if you hope to protect your investment and your relationship.

Don’t make assumptions about investments or work commitments

Failing to adequately outline and describe the breakdown of financial and practical contributions to the company now and as it grows is one of the biggest mistakes that new business partners can make. If you don’t clarify your expectations now, you could be on a path to conflict early in your business relationship.

Don’t just plan for business success

Maybe you have already talked about a point at which you would feel comfortable selling the company or opening it up to outside investment or stocks when the project succeeds. Having rules in place for when the company succeeds and grows is important, but you can’t ignore the possibility of failure.

One of you could have a medical event that prevents that person from contributing fully. Maybe a competitor gets the jump on you and manages to corner the market before you build your brand. You need to have plans in place for what happens if the business fails, including who retains what business assets and how you intend to dissolve the company.

Don’t assume that the business will always remain a partnership

Along with all the other terms that you include in your partnership agreement, scenarios in which one of you might buy out the other are important to address. Both of you deserve the opportunity to retire or move on to other projects. However, you also both deserve the right to be fully and fairly compensated for your investment in the business. Create terms now that will allow one partner to leave and the other to assume control of the company.

Depending on your existing relationship and business model, there may be other critical details you need to address. Discussing your business plan with an attorney familiar with creating partnership contracts can help you identify other critical points to address in your agreement.