The bond between brothers is like no other. Throughout history many great stories and tales have started with a brothers bond; Cain and Abel, Remus and Romulus, Zeus and Hades, etc. Similarly, many great businesses have also started with a brothers bond, think Walt and Roy Disney. However, not all brothers are meant to start a business together. Famously, Adolf and Rudolph Dassler started Adidas together, but ultimately decided they could not work together and Rudolph went on to establish Puma, creating a fierce rivalry. This is why before getting into business with a partner it is essential to write a partnership or operation agreement. If you are getting into business with a brother, sister, friend, or acquaintance, it is crucial to protect each owner in the case that the business or business relationship does not work out.
A partnership or operating agreement is a legal document that defines each person’s or partner’s roles and responsibilities in the business. It also details the day-to-day operations of the business and what happens in the event that someone dies or the company dissolves. It’s one of the most important things you can do before you start investing time and money into a business. Although partnership or operating agreement are not legally required, we strongly recommend completing one to prevent conflicts within the business.
Here are a few things to consider when crafting a partnership or operating agreement:
- Responsibilities. Decide who is going to be responsible for which parts of the business. You should list out any areas that need to be covered and decide who is going to be generally responsible for those areas.
- Workload. How will the workload be shared? Are partners expected to work set hours? Does one partner plan on working more or less than the other partners? How much vacation is allowed?
- Contributions. Determine what each partner is bringing to the business in terms of money invested into the business, equipment and intellectual property. Who owns the equipment if the business dissolves? How do you split the businesses assets if the business dissolves?
- Ownership Split. Once you determine what each owner is bringing to the business, you must decide how the ownership will be split. 50/50. 60/40. 75/25. Is one partner bringing more assets/equipment/intellectual property into the business that warrants a higher ownership percentage?
- Disputes. Disputes are inevitable in any partnership. The key is to have a mechanism in place to resolve these disputes as quickly and painlessly as possible. If the business is split 50/50, how will you resolve disputes? Does one owner have the ability to break a tie vote? If not 50/50 split, will the owner with a higher percentage have the final say in disputes? Will you use a third party mediator to resolve disputes?
- Compensation. Do you plan to invest profits back into the business? Will you split profits and losses according to the ownership percentage?
- Partner Death/inability to work. If one partner dies or becomes unable to work, does that person’s ownership pass to a family member? Does the other partner have to ‘buy-out’ the other partners shares in the business?
- Partner Exit. What happens if one partner wants to leave? What happens if one partner wants to force the other partner out of the business? You should have something in place in either case.
- New Partners. What is the process for bringing on a new partner? Do all other partners or owners need to agree?
- Selling the business. Much like bringing on new partners, what is the process for selling the business? Do all partners need to be in agreement? What is one partner wants to sell and one does not? How do you break the tie? This goes back to dispute resolution.
Creating a partnership or operating agreement is essential to running a business with multiple owners. Every partnership or operation agreement will be different much like every business and every relationship is different. What works for one business or relationship may not work for all. Communication is key for not only crafting the partnership agreement but also running a successful business. This may not be the most fun or enjoyable part of starting a business, but it will save everyone involved from headaches down the road.
Leigh Magnotta
Business Consultant
The University of Scranton SBDC
800 Linden Street
Scranton, PA 18510
570-941-7588
Artwork adapted from freepik.com
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