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PARTNERSHIP PLANNER:A GUIDE FOR SUCCESSFUL BUSINESS

PARTNERSHIPS

An Initiative of the Aga Khan Economic Planning Boardfor the United States of America and His Highness

Prince Aga Khan Shia Imami Ismaili Conciliation andArbitration Board for the United States of America.

BUSINESSPARTNERSHIPS In community settings, opportunities arise to engage in businesspartnerships. In business partnerships, people come together out ofrespect, mutually beneficial characteristics, excitement and happiness.A business partnership can have its ups and downs. Acknowledging thisahead of time and planning to reduce later risks can prevent a lot ofunexpected stress in the future. Too often, out of a sense of respect, individuals will overlook discussing a proper business plan. The lack of a business plan can often lead to: 1) Misunderstanding regarding risks and expectations in the business.2) Future breakdown of financial opportunities and personal relationships.3) Misunderstandings about the responsibilities of involved partners. Having a clear business plan will allow for: 1) A clear written understanding of partnership roles and responsibilities.. 2) The mutual understanding of goals of the business, areas of concern, etc.3) Avoiding misunderstandings and minimize legal liability in the future. The attached questionnaire is designed to help you frame meaningfuldiscussions at the outset of a business partnership and drive thecreation of documents that confirm in writing a mutual understandingprior to commencing a partnership.

PLEASE NOTE THAT NOTHING IN THIS DOCUMENT SHOULD BE CONSIDERED AS LEGAL ADVICE. YOU ARE ADVISED TO CONSULT COMPETENT LEGAL COUNSEL.

O V E R V I E W

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BUSINESSPARTNERSHIPS T A B L E O F C O N T E N T S

Basic Checklist Worksheet Overview Detailed Worksheet FAQs Blank Worksheets

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Brief list of questions to ask before establishingpartnership

Summary of topics covered in partnershipworksheet

Page 4Comprehensive set of questions to help encompassnecessary topics for establishing partnership

Definitions of basic business terms and frequentlyasked questions

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PARTNERSHIPAGREEMENT

What is the name of the business? What is its purpose? What are the responsibilities of each of the partners? How much time is each partner expected to commit? What contributions are expected from each partner at the start ofthe business? What if the partnership needs more capital? How will the ownership be split amongst the partners? Will it bebased on monetary contributions? Time contributions? How will the profit & loss be distributed amongst the partners? How much power does each partner have to commit the partnershipto legally binding agreements? How will partner disputes be managed? How will changes in the partnership be handled including death,disability, exit, etc? What is the process for adding new or promoting partners? What is the process for selling the partnership? Will there be a confidentiality agreement?

B A S I C C H E C K L I S T

WE STRONGLY RECOMMEND WORKING WITH AN ATTORNEY OR USING AN ONLINELEGAL SERVICE TO CREATE A PARTNERSHIP AGREEMENT.

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ANSWER THE QUESTIONS IN THE CHECKLIST AS YOUDISCUSS THE LIST WITH YOUR PARTNER(S). BE SURE TOWRITE DOWN YOUR ANSWERS FOR RECORDS.

BUSINESS PARTNERSHIPSDETAILED PLANNING WORKSHEET OVERVIEW

1 Understanding the Fundamental Business This section covers basics about the business suchas expenses, licenses, and profit/income.

2 Business Technicalities: Structuring, Forming andRunning the BusinessThis section covers the specific roles of eachpartner, contributions, operating procedures, andfinancial responsibilities.

Partner Expectations: What Will the PartnersReceive?This section clarifies when and how profits ordividends will be distributed.

Exit Strategy ConsiderationsThis section outlines how, if any, partner can endthe partnership and leave the business fairly andin agreement with all parties.

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BUSINESS PARTNERSHIPWORKSHEET

1. Is it an existing business or a newly opened business?

2. Type of business?E.g. convenience store, auto repair, magazine publisher, landinvestment, etc.

DISCUSS EACH OF THESE QUESTIONS WITH YOUR PARTNER(S). BE SURE EVERYONEHAS THE SAME UNDERSTANDING OF THE ANSWERS TO THESE QUESTIONS. FEEL FREETO USE ADDITIONAL PAPER IF NECESSARY TO ENSURE ALL PARTS OF THE QUESTIONARE ANSWERED.

SECTION 1: UNDERSTANDING BUSINESS FUNDAMENTALS

Section 1: Understanding Business Fundamentals

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4. Who will be the potential customer?E.g. Retailers/Resellers (i.e. if a business is a wholesaler), Tenants (i.e.if business is real estate landlord), Consumers/Clients (i.e. if businessis retailer of goods or a service provider)

3. What is the location of the business? Which neighborhood/area isthe business located in? E.g. from where does the business sell its goods/services? Is it aleased space, owned property, from home or is it online?

CONTINUE TO ANSWER THE QUESTIONS IN DETAIL. NOTE THE EXAMPLES TO HELPYOU THROUGH YOUR DISCUSSIONS.


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6. Are any permits or licenses required? Yes or no? If yes, list.Under whose name will these licenses be? Who will pay for thelicense fees? Do all partners understand the liabilities of thelicensee?

5. What expenses will the business have, and how much? Thinkabout start up expenses and other operational expenses. E.g. lease or rent, inventory, insurance, marketing, legal, andaccounting services, employee wages and payroll taxes, etc.


COMPLETE THIS SECTION CAREFULLY. BE SURE TO LIST AS MANY SPECIFICS ASPOSSIBLE TO ENSURE CLARITY.

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7. How will the business generate income and be profitable?E.g. selling grocery products, repairing vehicles, selling advertisingspace, selling land, investing in companies etc.


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a. Differing tax consequences. b. Differing liability protections. Understand which structures offer individuals protection fromliability that may arise from the business, and for each of theentities understand the situations in which liability protectionfor you as an individual would not be available. In addition, besure to understand how to maximize the chances of protectionfrom individual liability. c. Governance. What type of governing structure will the business entityhave? Will each partner have an equal vote, or will votingpower be proportionate to each partner’s amount ofinvestment? Will more than 50% of the votes be enough forcertain types of major decisions (e.g. sale of the businessassets), or will a higher percentage of the votes be required forsuch types of decisions? How will deadlock be handled? The business will be the following type of partnership:

8. How will the business be structured? What are the differences?Sole Proprietorship General PartnershipCorporation (S Corp, C Corp)Limited Liability Corporation (LLC)Limited Partnership (LP)

In order to determine the best structure, consider the following:

READ THROUGH THIS SECTION CAREFULLY. DECIDE WHICH ONE BEST SUITS YOURBUSINESS AND PARTNERSHIP. CONFIRM THAT ALL PARTNER(S) UNDERSTANDWHAT KIND OF BUSINESS THE NEW VENTURE WILL BE. BE SURE TO USE ADDITIONALPAPER IF NEEDED.

SECTION 2: BUSINESS TECHNICALITIES: STRUCTURING, FORMING,AND RUNNING THE BUSINESS

Section 2: Business Technicalities

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9. What kind of investment is being contributed?

a. Is it a cash, labor, personal goods, equipment, inventory,knowledge/expertise, etc.? If cash is not being contributed, howwill the value of the non-cash contribution be determined?

SECTION 2: BUSINESS TECHNICALITIES: STRUCTURING, FORMING, ANDRUNNING THE BUSINESS

COMPLETE EACH ANSWER IN FULL DETAIL TO ENSURE ALL PARTNER(S)CONTRIBUTIONS ARE UNDERSTOOD AND TO PLAN FOR FUTURE NEED OF MONEY.

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b. What if the business needs more funding (money) at a laterdate?

1. If the additional funds were to come from an individual partner, would the additional funds be in the form of a loan from the individual partner to the business? 2. What will the repayment terms of the loan be? (E.g. amount of interest charged, amount and frequency of installments, etc.)

COMPLETE EACH ANSWER CAREFULLY. IT IS IMPORTANT TO THINK ABOUTHYPOTHETICAL SITUATIONS AS MENTIONED IN THESE QUESTIONS TO PREVENTCONFLICT.

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10. Partners’ Roles and Responsibilities a. What roles and responsibilities will each partner have? Hours/benchmarks (for work at, or related to, the business) expected from each partner? (be specific)

3. Would the additional funds from the individual partner bein the form of an additional investment by the partner formore shares in the business entity?


c. Intellectual Property: if something of value is created in thebusiness e.g. new product or new idea that can be monetized,who will own it? Will it be the person who created it or thebusiness or will it be joint.

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c. What provisions will there be for unexpectedcontingencies E.g., serious family illness, death, disability, or some other life event that disturbs a partner’s abilityto work productively?

d. Will there be any restrictions on partners owning anyshare, or participating, in other businesses? E.g. in anycompeting businesses within a certain distance of thepartnership’s business? How long will the restriction befor?


b. How will partners be accountable for meetingexpectations?

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Loss Allocation

a. Will the individual partners be expected to cover any losses of the business?

b. Will all partners share equally in the losses?

c. Until what point can they be expected to cover the losses?


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11. Addressing Personal Liabilities Against Individual Partners

If there is a claim or lawsuit against an individual partner regardingany business-related matter, who will pay towards the legal fees forthe individual partner’s defense in the lawsuit and for any judgmentor settlement amount that the individual partner becomes legallyobligated to pay?

a. Will the individual partner be solely responsible for his/her own legal fees and payment of the judgment or settlement amount?

b. Will funds for the legal fees, judgment, and/or settlement amount be paid, partially or entirely, from the business?

THINK ABOUT THE SITUATIONS BELOW CAREFULLY. EACH PARTNER BRINGSLIABILITIES INTO THE BUSINESS AND UNDERTAKE MORE AS THE BUSINESS ISESTABLISHED. DISCUSS HOW CERTAIN SITUATIONS WOULD BE HANDLED IF THEYARISE.


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c. Does the answer depend on what the claim or lawsuit is for? (If so, what about a claim or lawsuit based on the actions of a specific individual partner? What about a claim or lawsuit based on the individual partner’s guarantee of a lease for the business?)

12. What legal agreements, applications, and insurances should bein place? Under what name (individual or company name)?E.g. operating agreement/bylaws, shareholders’ agreement,liability insurance, workmen's compensation insurance,employment agreements, website disclaimers, etc.

AS YOU COMPLETE THIS QUESTION, REMEMBER LIABILITIES CAN AFFECT PERSONALLIVES AS WELL. DISCUSS WHO WILL UNDERTAKE THESE LIABILITIES WHILEESTABLISHING THE BUSINESS, HOW WILL THEY BE PROTECTED, HOW WILL OTHERPARTNERS HELP, ETC.


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13. Resolution of DisputesHow will any disputes be resolved?

b. Will some third-party body or individual be designatedahead of time to mediate or arbitrate (E.g. The Aga KhanConciliation and Arbitration Board)?

a. Mediation, arbitration, litigation (court)?

CONFLICTS ARE COMMON IN PARTNERSHIPS. IF ONE SHOULD ARISE, HOW WOULD ITBE RESOLVED WHILE ALLOWING PROTECTION AND UNDERSTANDING OF ALLINVOLVED PARTIES. DISCUSS THE PROMPTS BELOW CAREFULLY AND LIST THEANSWERS IN DETAIL.


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14. Meetings – all should have “minutes and resolutions” (i.e. writtennotes of what was decided)

b. Annual meetings and special meetings – when andwhere?

a. Initial/Organizational Meeting – when and where?

KEEPING A DETAILED RECORD OF ISSUES THAT DEVELOP, PLANS FOR THE BUSINESS,AND MUTUAL UNDERSTANDING AT ALL TIMES IS CRITICAL FOR A PARTNERSHIP.HAVING REGULAR MEETINGS ALLOWS FOR THOSE DISCUSSIONS. REVIEW THEQUESTIONS BELOW IN DETAIL.


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15. Bankruptcy, Divorce, Incapacity, or DeathIf a partner experiences bankruptcy, divorce, incapacitation, ordeath, what are the possible consequences to the partnership?Consider legal agreements and/or insurance coverage to mitigatehardships and avoid disputes.

OFTEN, UNEXPECTED CATASTROPHIC EVENTS DO OCCUR. DISCUSS THE QUESTIONSBELOW AND STRATEGIZE A PLAN FOR YOUR PARTNERSHIP SHOULD THEY HAPPEN.


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16. Distributions / DividendsHow often? How will the amounts be determined? How much ofthe profits should be left in the business? When are partnersallowed to take profits?

BE AS SPECIFIC AS POSSIBLE TO ENSURE CLARITY.

17. Salary / WagesTo whom, how often, and how much?

Section 3: Partner Expectations

SECTION 3: PARTNER EXPECTATIONS: WHAT WILL THE PARTNERS RECEIVE?

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18. LoansCan partners borrow from the business? If so, what is theprocedure (E.g. written approval by all partners)? How will theterms be determined? (E.g. the principal amount, time period forpayback of the loan, interest, etc.).


SECTION 3: PARTNER EXPECTATIONS: WHAT WILL THE PARTNERS RECEIVE?

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19. Agreement (in advance) of which circumstances and theprocess under which the exiting partner’s share can be sold to, orpurchased by, one or more of the other partners.


a. What circumstances will trigger the right of the exitingpartner to sell his/her share to one or more of the otherpartners?

b. What circumstances will trigger the obligation of oneor more of the other partners to purchase the exitingpartner’s share? How many days of notice is required?

Section 4: Exit Strategy Considerations

SECTION 4: EXIT STRATEGY CONSIDERATIONS

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c. How will the price of the exiting partner’s share bedetermined under such circumstances?


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BE AS SPECIFIC AS POSSIBLE TO ENSURE CLARITY. DISCUSS THE QUESTIONSPRESENTED.

d. How can everyone ensure that the other partners havethe financial ability to pay for their purchase of theexiting partner’s share? (E.g. Will the other partners have good enough credit,personal assets, and/or collateral to obtain a loan from abank? Will the business be profitable enough for thebank to finance the other partners’ purchase of theexiting partner’s share? Will the exiting partner bewilling to take a promissory note and collateral orpersonal guaranties for the sale of his/her share to theother partners?)


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e. In what way, if any, will the other partners’ purchase ofthe exiting partner’s share affect everyone’s rights (e.g.voting rights, rights to receive distributions/dividends,rights to salary/wages, etc.), roles and responsibilities inthe partnership?

f. Will the exiting partner be required to comply with aconfidentiality agreement?


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g. Under what circumstances will the exiting partner berequired to comply with a non-compete agreement andwhat will be the terms of the non-compete agreement?


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20. Agreement and the process under which the exiting partner’sshare can be sold to a third party.

a. What circumstances will trigger the duty of thepartnership to sell the business?

b. When and how will a broker be selected to assistin selling the business?


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c. What terms (E.g. commission amount, length oftime, exclusive broker, etc.,) will the partnership bewilling to hire the broker?

d. Will there be a formula to determine a price pointunder which the partnership will not agree to sellthe business?


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e. What will the partners do if they are unable tofind buyers under such circumstances orrestrictions?


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THE FOLLOWING FAQS ARE PROVIDED FOR INFORMATION PURPOSES ONLY ANDSHOULD NOT BE CONSTRUED AS CONSTITUTING LEGAL ADVICE. IF YOU HAVELEGAL QUESTIONS ABOUT YOUR PROPOSED PARTNERSHIP, YOU ARE STRONGLYADVISED TO CONSULT COMPETENT LEGAL COUNSEL.

FAQs

2. What kind of entity should we form for our business? Soleproprietorship vs. general partnership vs. corporation vs. LLC vs.limited partnership – what’s the difference?

Here is some very basic information that relates only to liabilityprotection. For tax and other considerations, a CPA and/orlawyer should be consulted.

a. Sole Proprietorship: One individual IS the business. That individual owns theassets and carries all the liability personally.

What is an "entity" and what does it have to do with business? 1.

An “entity” in a business context is an organization. Mostentities are “limited liability entities”, which are formed as partof the individual owners’ attempt to limit their personal liabilityby using the limited liability entities to distance the individualowners from the liabilities of the business. The law generallytreats a limited liability entity like a person that is separate andapart from the people that own the entity. This protection is notabsolute, however. Corporations and LLCs are examples oflimited liability entities.

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c. Corporation: The corporation owns the assets of the business.“Shareholders” (usually, individuals) own a corporation. Specifically, the corporation is made up of stock thatindividuals own. Because the owners simply own stock(and no other business assets), the law generallyconsiders the individual owners of stock separate fromthe corporation. The corporation is generally intended to absorb theliabilities of the business and therefore to shield theindividual owners from those business liabilities. Shareholders vote for who the directors will be.“Directors” govern the activities of the entity and willvote on any material matters concerning the corporation(e.g. buying real estate, getting loans, etc.) includingappointing officers of the corporation. To maintain the corporate shield/veil of liabilityprotection from the individual owners, corporations haveseveral formalities that should be followed, includingmeetings and voting.

b. General Partnership: Multiple people together are the business andcollectively own all the business assets. Theseindividuals are collectively referred to as a “generalpartnership”. Each of the partners carries the liability ofthe business. Also, one partner can bind the otherpartners to obligations/liability. For example, if onepartner signs a contract, the entire general partnershipwill be bound to the obligations under that contract.

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d. LLC (also known as a “limited liability company”): The LLC owns the assets of the business. “Members”(usually, individuals) own an LLC. Specifically, the LLC is made up of membershipinterests that individuals own. If the LLC will not be managed by the Members, theMembers vote for who the managers will be. If the LLC will not be managed by the Members, the“Managers” will govern the activities of the entity andwill vote on any material matters concerning the LLC(e.g. buying real estate, getting loans, etc.), includingappointing any officers. Generally, an LLC has very similar liabilityprotections/shields for the individual owners. However, generally speaking, an LLC may be structuredso as not to require as many formalities to maintainthese liability protections. LLCs are sometimes considered to be easier to maintainand less formal compared to corporations.

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e. Limited Partnership: The limited partnership owns the assets of the business.Usually, “Limited partners” (usually, individuals)collectively own a vast majority of the limitedpartnership. The limited partners are generally shieldedfrom liability. However, the entire limited partnership is run by a“general partner,” which takes on all the liability of thebusiness but which may often be a corporation or LLCin order to try to shield from liability the individualsthat are involved in the general partner’s actions. Limited partnerships are more common arrangementswhen there are several passive investors who have nointerest in voting.

3. How do the individuals fund the entity?

Typically, each individual will offer something in exchange forownership. Most often, individuals will offer cash in exchange forownership (e.g. stock, membership interests, etc.). It would be advantageous to have a purchase and saleagreement made to evidence the transaction (i.e. the purchase ofthe ownership). The cash that is injected into the entity for thepartners’ purchase of ownership in the entity is usually what isinitially used to fund the entity.

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4. How will any losses be allocated or shared in the business?

Loss Allocation: by definition, partners share the profits andlosses from a partnership. In many cases, partnerships will just split the profits and lossesequally among the partners. If the partners are not equal, thedistribution will be in proportion to their relative ownershipshares. In some cases, the distribution may be different from thepercentage ownership, especially when one partner hascontributed more capital to the business. When the profits andlosses are allocated to the partners in a different ratio from theirpercentage ownership or relative capital contribution, it isreferred to as a special allocation.

Notably, sometimes ownership will be offered in exchange foreffort (i.e. “sweat equity”), expertise or non-cash asset, in whichcase it would be helpful to assess a cash value for this effort,expertise or non-cash asset at the time of the purchase (ofownership). Individuals can also offer a promissory note (i.e., a loan) inexchange for ownership, in which the individual agrees to pay acertain amount over time.

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5. What are some considerations when buying an existingbusiness?

If acquiring an ongoing business, what is being acquired is theprimary consideration. Is this a purchase of assets (i.e. furniture,fixture, equipment, inventory, goodwill, etc.), or the entity thatowns the assets (i.e. the corporation or LLC). Each option comes with its own set of considerations. Forexample, a purchase of the entity likely includes the assumptionof the existing liabilities of the entity. On the other hand, apurchase of only assets might require new permits and licensewhich the existing entity may already have.

6. Why does it matter what space will be used for the business?

Online: likely needs a website and hosting. Leased Space: Requires a signed lease. If the business is anentity, the landlord may require a personal guaranty by one ofthe partners. Purchased Space: Title issues and financing issues will need to beconsidered.

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8. What is collateral?

Typically, a loan from a lender is considered “secured debt,”which means that the lender wants to remain secure that it willhave some kind of recourse if the borrower is unable to pay backthe loan. In order to get that security, lenders typically requirethe borrower to allow the bank to put a lien on the assets of theborrower (e.g., the business itself or other assets of the businessor the owners). The assets that have a lien put on them areconsidered “collateral”. In the event of a failure to pay back theloan, the lender usually has the ability to exercise its right on thelien by foreclosing on the collateral to recoup the amount of theoutstanding loan. If a borrower does not have enough assets tooffer as collateral, it will be harder to find a lender that is willingto offer a loan.

Certain businesses are required to have certain permits orlicenses for the business or for the employees. E.g., businessesthat sell alcohol (such as, convenience stores), hair or nail salons,insurance agencies, law firms and many more all require permitsand/or licenses.

7. If the business involves sale of goods/services, any permits orlicenses required for any product/service of the business to besold?

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10. What is a non-compete?

A non-compete, also known as a “covenant not to compete,” at itsmost basic level, is just an agreement by one person not tocompete with another. However, every state has differentrequirements for a non-compete to actually be valid andenforceable. For example, several states require certain kinds oftime, location and scope limitations on a non-compete (e.g. nocompeting business that sells X goods for a period no longerthan 1 year within a 5 mile radius of the business location). It should be discussed early on whether any of the owners arewilling (or whether it will be required by all owners) to agree to anon-compete in the event of an exit from the business later on. Other questions to consider: o Is every owner willing to enter into a non-compete with a buyer in the event of a sale of the business? o If one signs a non-compete, will he or she be able to work, or will that person be unable to earn a sufficient living then?

Someone who signs a personal guarantee agreement is alsoknown as a “guarantor” or a “surety.” A surety is one whoanswers for the debts of another. When an entity (e.g.corporation or LLC) is getting a loan or signing a lease, a bank ora landlord will typically require an individual person (most often,one or more of the principals/owners of the entity) to guarantee(answer for the debt) of the loan or rent. Once signed, personal guarantee agreements generally put theguarantor in a position where they are just as exposed to liabilityas the borrower or tenant.

9. What is a personal guarantee agreement, and what does itusually say?

WORKSHEET PLEASE USE THE FOLLOWING SPACE TO ANSWER THE QUESTIONS IN THE

SECTIONS ABOVE

WORKSHEET

I would like to emphasize how essential it is that sufficient, careful and dispassionatethought be given before partnerships and alliances are formed. I think it is fundamentalthat the parties ensure that they have common goals. I think it is equally fundamental thatthe parties quantify — each of them — their individual expectations. A clear frameworkmust exist with clear goals shared by both or all partners, and quantified expectationsmust be agreed for each of those partners. The partners must agree, as early as possible,what are their criteria for success, how they will assess and evaluate their business, andhow they will agree on and take any corrective actions that may be necessary. We mustavoid absolutely situations where one or another of the partners might feel that a promisehas been made to him that has not been fulfilled, that his partner has benefited more fromthe alliance than he has, etcetera. This occurs too frequently and is something that mustbe avoided.” Prince Amyn MohammedIsmaili Economic Forum, Dubai, April 26, 2008

HIS HIGHNESS PRINCE AGA KHAN SHIA IMAMI COUNCIL FOR THE UNITED STATES

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