A partnership agreement is a document that specifically sets out the points on which you and your partners have agreed on. This means, it will spell out each partner’s right and responsibility in a partnership business.
One of the biggest advantages of partnership firm is that it creates a pool of talents to make the most of shared resources. Even though it’s a great way to leverage existing resources between partners, a poorly written partnership agreement can make you personally liable in future.
Having this in mind we suggest you to look for following 5 clauses before signing a partnership agreement.
Profit and loss sharing ratio and contribution to partnership business
Profit sharing ratio in partnership agreement may work well at initial discussion while drafting the partnership agreement but later at the end of the financial year, when each partner will sit and decide on profit to be distributed then partners may start divvying up the profit and tracking it back to individual efforts, results and workloads.
This is the most common problem in a partnership agreement if you don’t outset roles and responsibilities of each partner clearly.
This means, before getting into partnership agreement you need to find how efforts and results will be valued and monetized and measured.
Memory is fluid and unreliable. To make sure that the financial contribution that each partner brings to the partnership business is written down, you need to put a separate clause in partnership agreement by specifying the percentage of partner’s contribution in value and in proportion to the total contribution.
Responsibility and decision making power of partnership
Partnership agreement should define responsibility very clearly for the day-to-day operation and each partner should be very clear on their duties, responsibilities and roles.
For instance, it has to be decided that who will maintain the books of account for partnership firm? Who will deal with customers or clients? Who will negotiate with creditors? Who will take care of execution part including supervise of employees? How bank accounts are going to be managed and who will be the authorised person to withdraw money? How much salary each partners will be paid per month? Can investment decisions be taken by managing partner without the consent of other partners? Make sure that you have covered everything.
While setting up decision making process for partnership firm, you need to find out what constitute major or minor decision for the business and then decide what kind of decision requires unanimous vote of all partners and what are the decisions that each individual partner can take on their own.
Authority of partners
Before getting into a partnership business, you have to remember that all partners are jointly and severally liable for all debts and obligations of the partnership firm. Each partner is also personally responsible for the liabilities of other partners.
Without a clause in partnership agreement, any partner may bind the partnership without the consent of other partners. If you do not want other partners to get liable for the act or wrong doings of one or several partners then you have to make this clear in your partnership agreement.
Admission,death and withdrawal of partners in Partnership Agreement
At any point of time, you may require the partnership firm to expand the business by bringing new partners into the partnership business. To admit a new partner, your partnership agreement should have a defined procedure to make this process a lot easier.
Similarly, rules are also required to be set for departure, death and withdrawal of partners. A separate buyout agreement or clauses in partnership agreement must specify what happens to the ownership of the business if something like death, departure or withdrawal of partners happens to the partnership business.
How to resolve dispute in partnership firm
Before starting your partnership firm you and your partners may say that “in case of any dispute, we will sit down and discuss”. But that does not mean that you all will agree in case issue comes up.
You might approach court to resolve issues or can have a business advisory board to handle these issues internally.
Before getting into business, you need to make sure that you have it written in partnership agreement.
Planning ahead at the time of drafting partnership agreement can save your time, legal disputes and costly court battles.
At the end, we suggest you to have partnership agreement drawn up by a legal practitioner or professional who can explain issues in detail and make sure that the agreement is drafted exactly based on the needs of partners and business.