Posted by: Tyler
Last updated: November 26, 2022
Forming a partnership can be incredibly beneficial for micro products and small businesses, as it allows them to combine their strengths and expertise to create a more comprehensive offering and increase available resources.
Establishing a legal partnership is a simple process that any two or more individuals or businesses can complete. You can do so by creating a partnership agreement to safeguard the rights and responsibilities of all parties and provide guidance for future decision making and potential conflicts.
Here's what your partnership agreement should include:
1. Name of partnership
What's the name of your business? Maybe an official business has already been legally registered. If it has, then the official name of the business should be used as the name of the partnership.
If a business hasn't yet been registered, then you could use the name of the product, or even a collaboration of the names of the individuals involved in the partnership.
2. Each person's contributions
What is each partner bringing to the table? An existing product? Cash? Skills and abilities?
You don't necessarily need to spell out specifics regarding how much time a partner will spend per week on the business, but it should be outlined what the expectations are. Something like "Partner X will be providing part-time, ongoing marketing services on a weekly basis."
How much equity (or value in the partnership's stock) should each partner receive? If there are 2 equal partners, then that would equal each having 50% of the equity. But, depending on contributions and allocations, there might be a more fair percentage split for your partnership.
You should also have either a vesting schedule or a clawback provision. See below.
4. Allocations of profits and losses
Until your business has sales, who will cover any necessary expenses? And will they cover the expenses 100%? Or 50%?
How much will each partner receive from the profits? Perhaps 50% of all profits will be re-invested in the business, and then the 2 partners will each receive 25%?
5. Authority and decision making
Who will have the authority to bind the partnership without the consent of the other partners (i.e. contract of debt)? Or maybe no one can, and they all have to be agreed upon by all partners.
How will decisions be agreed upon? Will all decisions require unanimous vote by all partners? Or will one partner have the ability to usurp the other(s)?
6. Admitting/withdrawing partners
How might your partnership allow in new partners? Will there be a procedure? How will the voting work?
What about if someone passes away? What will happen to the partnership then? Would the remaining partner(s) retain all rights, or will the deceased ones family members receive their share?
7. Resolving disputes
There are likely to be times when you and your partner(s) don't agree. What will you do in that scenario? Could you assign a mediator? Or should you go straight to court?
8. Clawback provision
What would happen if you became partners with someone who then soon left afterwards? Would they keep their equity and allocations? Or would they be removed and full equity/ownership returned to the remaining partner(s)?
Clawback provisions allow you to specify how that will happen, and you could set it up however you'd like. For example, if a partner is in the partnership for less than say 6 months, the leaving partner receives no compensation. But if they're in the partnership for 6-12 months, maybe they receive 10%? And so on. It's up to you!
Bonus: Have a lawyer review/draft your agreement
We are not legal experts at MicroPartners, so we would advise that you take the next step and have a lawyer either draft a partnership agreement for you, or at least review your current one.
This will ensure that no confusing language is added, and additional scenarios could be discussed and recorded.
Once you have all of the above written out and signed in a document, your partnership exists! As you can see, it's really simple, but taking the time to think through and generate a complete partnership agreement will protect and save you from future uncertainties, and give you the confidence to move forward and grow your business with your partners!
If you've signed up for a free MicroPartners account, you can actually download a free template to help you get started!