HOW TO CREATE A PARTNERSHIP AGREEMENT

VERY HAPPY DAY TO YOU,

It is a common belief that if you and your partners do not spell out your rights and responsibilities in a written partnership agreement, the chances that you will be ill-equipped to settle conflicts when they arise are high. At times, even a minor misunderstanding may erupt out of proportion and become full-blown disputes.

 

Generally, your state’s law will govern many aspects of your business affairs if there is not any written agreement saying otherwise.

If it is the case, then the next question arise is how you create a partnership to avoid such dispute. Any sharing of experience both good and bad is always welcome here. 

I) How a partnership agreement helps your business

Normally, partnership agreement allows both contract parties to structure their relationship with each other in a way that suits their business. They usually lay down the shares of profits or losses among them, the roles and responsibilities of each party, what will happen in the event that one party decided to leave and other important terms and conditions.

i)  Partnership Act

This statutes normally establish the basic legal rules that govern many aspects of partnership unless they agreed otherwise.

Due to its generality,  the rules sometimes may not be suitable for your particular situation. As such, it is advisable to incorporate all your the points you and your partners have agreed upon.

ii) What need to be included inA list of the significant issues that need to be included, are discussed below:-

a) Name of the partnership.

A name need to adopted for the partnership. You may use your first name or fictitious business name such as AAA Home Renovations.

b) Contribution from each partner

It is important that each party's contribution in term of cash, property or services to the business before it opens and what's the ownership percentage of each partner will have. Disagreements over contributions have doomed many promising businesses.

c) Proportion of profits and losses 

Several question arise, as follow, will arise:-

i)  How will the profits and losses be allocated in proportion to each party in the business?

ii) Will each partner be entitled to a regular withdrawal of allocated profits from the business?

iii) Will all profits be distributed at the end of each year ?

You and your partners may have different ideas about how the money should be divided up and distributed, and each of you will have different financial needs, so this is an area to which you should pay particular attention.

• Partners’ authority.

Without an agreement to the contrary, every partner can bind the partnership without the consent of the other partners. As such, you must spell it out clearly in you partnership agreement should you want otherwise.

• Decision-making.

No doubts there is no magic formula or language for this area among all involved parties, you will, at least, head off a lot of trouble should you work it out beforehand. You may want to require an unanimous vote for all the involved parties for every business decision regardless of the amount involved. Alternatively you may require an unanimous vote for major decisions, subject to certain amount, and allow each party to make minor decisions on their own. As such, your partnership agreement will have to describe and define what constitutes a major or minor decision. Hence, it is always advisable to think carefully all these issues when setting up the decision-making process for your business.

• Management duties.

It is always encouraged to have some guidelines on some key management details in advance. For example, Who will responsible to deal with customers? Supervise employees? Negotiate with suppliers? Give it a deep thought the management needs of your partnership and be sure you have covered those critical areas.

• Admitting new partners.

New partners may be brought due to the expansion of the business or other needs arise. As such, agreeing on a procedure for admitting new partners will make your lives much easier when this need arises.

• Withdrawal or death of a partner.

The rules for admitting new partners to the business may be used as the rules for handling the departure of a partner. Further more, it is also advisable to incorporate a reasonable buyout scheme in your partnership agreement.

• Resolving disputes. 

It might benefit everyone involved if the partnership agreement provides for alternative dispute resolution, such as mediation or arbitration in the event of the deadlock on a certain dispute. Going to court may be a costly issue comparative to the former.

NOTE THAT the above lists are not exhaustive, but it is a guide for creating a partnership agreement. You may include in other issues,  especially those issues which are critical to your business due to its nature and complexity of  your partnerships.

Trust you find it useful and helpful, as our normal ways of rewarding our readers.

Seeing you again and more exciting articles are in the pipelines for your discovery.

James Oh