Posted 04 May 2020, Editor's Desk
Critical Points in a Partnership Agreement
A Partnership is a legal agreement between two or more individuals who decide to do business together. All the partners involved have a share in the assets as well as the profit and loss of business. It documents the responsibilities of all the partners.
However, the partnership agreement differs from business to business depending upon its scale and objectives. Also, a partnership agreement is subjected to laws governed by the state.
Let us see the key aspects of a partnership agreement that business owners need to keep in mind.
1. Percentage of Contribution-
The first and foremost thing that needs to be documented in a deed is that how much each partner will contribute in the business.
The agreement should clearly define the contribution by each partner in terms of money, time and efforts
2. Distribution of Profits-
This is one of the most fundamental aspects of a business partnership agreement. How much would be the share of each partner in profits? The agreement must outline how the profits will be distributed amongst the partners.
It must also state how what each partner will be paid.
This is the most crucial aspect of the agreement and important for smooth business operations.
You must differentiate between the decisions that require a unanimous voice or the ones that can be taken by a single partner.
A provision must be there in the agreement to address the disagreement or dispute between the partners.
3. Partner Authority-
Can any of the business partners bind the others to a contract without consent? The answer is Yes! That’s why it becomes important that the binding power or the partner authority is clearly defined in the business partnership agreement.
It will save the company from unmanageable risks.
4. Resolving Conflicts-
A clause regarding the dissolution of the disputes must also be included in the terms and conditions of the agreement.
If an issue has not been resolved with the business partners then a provision in the agreement will help ease the process of dissolution.
5. Withdrawal or Demise of a partner-
An unfortunate contingency can occur anytime. A smart business owner should be able to foresee and must be prepared for it.
If a partner withdraws due to disagreements or god forbids has a sudden death then a clause of departure must be included in the agreement.
A good agreement has a buyout provision that helps in determining the business value and how the departing partner will be paid.
The above-mentioned aspects constitute an essential part of the business partnership agreement. However, there are a few other factors that should be considered before drafting the agreement. These are:
Non-Competitive Clause- This clause not only limits the partner from leaving the partnership but also restricts him from competing with the business partners within a restricted time frame.
Non-disclosure Clause, Non- Solicitation Clause: This clause limits business partners from revealing the proprietary business. In other words, you cannot revel to any other person, corporation or firm any confidential information about the enterprise.
It also restricts partners from soliciting employees away from the business partnership which means prohibiting an employee from utilizing the company's clients, customers and contact lists for personal gain once they leave the company
A business partnership agreement is significant for every business arrangement. It not only ensures the smooth functioning of the company but it also protects the rights of all the partners, their overall investment and the longevity of the business.