Consider a common scenario that plays out in the small business world: three friends who are all beer enthusiasts and amateur brewers get together one evening after months of talk, and they finally decide to go into business together and start a brewery. As loans are granted, supplies are purchased, and a warehouse is rented for the space, everything seems to be going along just fine. However, after opening, profits are sluggish, and tensions rise amongst the three business partners/friends. Over the course of a few years, the “friends” title may be completely erased when disputes have further torn the small business apart before it truly had a chance.
Seventy Percent of Small Businesses Fail Within 10 Years
The truth is, running a successful small business is extremely challenging, especially when you are still building a customer/client base in the first few years. 83 percent of small businesses struggle with cash flow, 42 percent of owners believe that there is an insufficient need for their product, and 23 percent say they do not have the right team. This all leads to 70 percent of small businesses closing up shop by or before their 10th year. Your business plan needs to be flawless in order to beat the odds, and part of that is creating a solid partnership agreement so that disputes can be avoided.
What Does a Partnership Agreement Need to Cover?
A partnership agreement is a binding contract between a business’s partners or co-owners. Below is a list of some of the most important aspects of what a partnership agreement should include:
- Taxes: Who is responsible for paying taxes at the end of the year?
- Benefits and Pay: This can define salaries, bonuses, life insurance, medical coverage, and other benefits.
- Business Details: When will the business open, what is its purpose, what is its expected revenue, and how many employees will need to be hired?
- Ownership and Personal Contributions: This outlines what percentage each partner owns in the company, their personal financial contributions in the form of cash or personal property, and voting rights when making business decisions..
- Withdraw From Business: An agreement may describe how a partner can leave the business or what happens if they die. For short-term partnerships, the duration of the partnership needs to be defined with a start and end date.
- Non-Compete Agreement: When a partner leaves the business, it is common practice for them to be legally restricted from competing against their former company. This is called a non-compete agreement—something that may apply to employees as well.
A Chicago Business Attorney Is Available to Help Today
There are 1.2 million small businesses in Illinois, and they make up 98.2 percent of all businesses small and large, according to the Illinois Small Business Association. Much needs to go right in the first few years for a business to survive. The dedicated DuPage County business attorneys of Momkus LLC can help you start out on the right foot by working with you to create partnership contract that meets your needs. Contact us at 630-434-0400 to schedule a consultation.