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December 17, 2014

How To Create a Partnership Agreement for your Handmade Business

Partnership Agreements can get pretty detailed when you’re
setting up a larger corporation. They typically require a lawyer and several
scenarios around what happens to the business down the road in the case of a
dispute, closure or worse yet, death. Because handmade businesses are usually
on the smaller side, they don’t require as detailed of a report but it’s still
important to get some plans down on paper. As your business grows, so can the
agreement, but here are the basics.

What is a Partnership
Agreement?

It is a written and legal document that outlines the terms
of a business partnership between 2 or more individuals. In most cases it is
not required but it is always a good idea to have one. You can draft a
partnership agreement up on your own or consult a lawyer.

What should be
included?

You’ll want to start with the name of the partnership,
address and each partner’s name. Each member will need to date and sign the document
once all the terms are agreed upon. You can get as detailed as you like but
here are 5 basics that should be discussed and included:

1)
Roles & Responsibilities – who’s
doing what? Make a list of all the different areas of the business from start
to finish. Run through all the tasks it takes to make the product and sell it;
sourcing materials, cutting the fabric, sewing, tagging, applying to craft
shows, selling at craft shows, approaching retailers, updating the website and
social media pages, answering emails, tracking orders and payments, etc. If you plan to share the work equally, will
you both be able to put the same amount of hours in?

2)
Shares – how are you going to split the
company? Be sure you really sit down and think about this one. Although you may
have come up with the idea together, it doesn’t mean that the expenses and
workload will be split evenly in the future. Take a look at the roles and
responsibilities each partner has and if the shares seem fair based on that.
You may also want to cover how it will be handled if you want to bring another
partner in down the road.

3)
Money – How much money will each partner
put in to get the business off the ground and keep it afloat? You can base
these amounts off of your shares however if one partner is funding the venture
while the other is responsible for the labour, this method won’t work. On the
other hand, how will you handle getting paid and sharing profits or losses? Will
expenses be paid back fully first, before you being splitting the profits, or will a
certain percentage of income go towards expenses each quarter? Make sure you’re both on the
same page as to whether you want to receive a small salary or continue to put
profits back into the business to grow it.

4)
Decision Making – who has the power to
make final decisions? If you have more than 2 people in your partnership, a
voting structure could work or you can assign certain areas to each member and
give them the power to make decisions within that area. If your plan is to make
decisions together, you need to think about how you’ll handle it when you don’t
agree. Who has the authority to sign contracts for the business? If each
partner must give his or her consent, make that clear in this agreement.

5)
Worst Case Scenarios – the least fun
part; how will the business be handled if a partner wants out or has an untimely death. Outline the steps that should be
taken for each scenario so they can be easily followed should the situation
arise. Are there any rules for the person who wants to leave the business, such
as they can’t start a competing business? When the shares are passed onto a
spouse or family member in the case of a death, will that person have the
rights to make decisions about the business?

A Partnership Agreement may seem like an unnecessary task
when you’re first getting started, everyone is excited and you can’t imagine what could go wrong, but it really is important to draft one up. You never know
where your business will take you and if you think some of these areas are hard
to discuss now, imagine how it will be down the
road when everyone’s time, money and emotions are involved. If you get
everything down on paper you can just stick to the facts if a dispute arises.

*this article is in no way legal advice


Image courtesySicha Pongjivanich/FreeDigitalPhotos.net

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