Unrelenting Legal Support

3 protective terms to include in a partnership agreement

On Behalf of | Dec 22, 2023 | Business Law

Starting a new business partnership is an exciting endeavor. Both partners share the challenges of developing a new business operation, and any success achieved could lead to financial and professional gains. The trade-off for those opportunities is a substantial degree of risk. Partnerships require trust between the co-owners and can lead to mutual losses in some cases, particularly in scenarios where one partner proves to be unethical or incompetent.

Each partner needs to clarify expectations before committing to the partnership. The contracts negotiated between those embarking on a business endeavor together help establish key standards, such as what each partner intends to provide for the organization and what compensation they should receive for their contributions. A partnership agreement is crucial to the protection of both partners. The following special inclusions can help reduce the risk involved in a new business partnership.

Restrictive covenants

Many partnership agreements include terms that can prevent one partner from damaging the business if they exit the organization later. Restrictive covenants can prohibit direct competition, the disclosure of trade secrets and the solicitation of clients and employees. Non-solicitation, non-compete and non-disclosure agreements may all have a place in a partnership agreement.

Buyout terms

If one partner decides to exit the company or needs to do so because of unanticipated personal circumstances, a buyout may be necessary. Having clear terms for how to approach a buyout can speed up the process and minimize the risk of conflict.

Alternative dispute resolution requirement

Sometimes, business partners become embroiled in a disagreement. Maybe one accuses the other of embezzlement, or perhaps someone has proven to be less effective in their role than they claimed they would be. Business partners can have such intense disagreements that they end up going to court. Litigation can do real damage to their relationship, the business’s finances and possibly even its public reputation. Requiring that the partners sit down to negotiate, attempt mediation or attend arbitration before litigating could help resolve disputes amicably and privately.

If business partners take the time to address specific, common concerns early in their economic endeavors, they could be less at risk of major conflict and challenges in the future. For this reason, negotiating an effective partnership agreement can be as important as properly developing a business plan.