Are you planning to start a partnership business? Have you done your research? Did you find the right partner? And what about the partnership agreement and other legal aspects of the partnership?
If you have positive answers to all these questions, you are probably ready to go ahead in the partnership. But if you don’t, then, your research is far from over. So, just go on reading. In this article, we will discuss the most important clauses every partnership agreement needs. As you can imagine, there are many things business partners must decide upon before getting into running a business together. Your partnership agreement (or operating agreement) will mention such things, to protect you and your business from any adverse factors that may come around during the course of the partnership.
Drawing a partnership agreement may seem like a tedious job now, but it is one of the most important things you can do before going into a partnership. You should do it even if there is no such law because it is for your own good (just like wearing a helmet when riding a bike).
Clauses to Include in Your Partnership Agreement
1. Sharing and Contribution:
This section mentions the details of the money and other resources each partner is contributing to the business. It usually decides the sharing of each partner in the company. This clause should also mention the steps to be taken if the business demands more monetary investment in near future. Make sure to plan for the worst-case scenario. The clause should also mention if one or more partners are only investment partners in the firm.
The decision-making process and how the important decisions will be made should go into this clause of the partnership agreement. What if you could not reach a conclusion even after a serious discussion? Who will make the ultimate decision? How will you conduct the meetings for making a decision? Who will head such meetings? All these questions and some others must be answered in this section.
3. Violation of Agreement:
The partnership agreement should be treated like the official rule-book of the business (it actually is), and therefore, any sort violation of any agreement rule should be handled accordingly. Depending on the type of violation, the guilty partners and/or other business entities can be made to do certain things. These things and actions, along with conditions, should be clearly mentioned while drawing the agreement in the beginning.
4. Distribution of Profits/Losses:
How often and how much money can business partners take out of the company funds. Would there be any fixed salary? If the company is planning to expand on a national or global level, would it affect the salaries of the individual partners? If yes, how? Will partners ever get back the money they initially invested in the business? And so on. Answer all these questions with the suitable answers to make sure that you and your partners are in sync.
5. Death of a Partner:
Bad things are usually unannounced, and it is best to plan for them in advance. One of such situations is the accidental death or disability of one of the business partners. This section will mention the methods to tackle such things, including the details of insurance, trusts, shares, and wills. Each partner, in consultation with other partners, should make the decision on how he/she wants their affairs to be handled and who would take their position in the company, etc.
6. Welcoming New Partners:
This is another important clause to include in the operating agreement? What if your business expands and you wish to include more partners in it? This clause will include the conditions of sharing, responsibility and other things for new partners in the business. There should definitely be a provision for protecting the integrity and value of the old partners when writing this section.
7. Dissolution of Partnership:
This is the ultimate and one of the most important clauses that should definitely go into your partnership agreement. What will happen if one of the partners decides to leave or is forced to leave or has to leave for some reasons? The beginning of the partnership, when all partners are in agreement, is the best time to constitute an exit strategy so that there are no arguments when the actual time comes, and the matter can be resolved peacefully. This should include the process of selling/distributing the shares of the said partner, replacing their position if required and/or dissolving the partnership.
Well Worth the Time and Effort
Indeed, building up a partnership agreement takes some time and some cash, however, it’s certainly justified regardless of the significant serenity to know you and your partners are in agreement and have similar desires and understanding about how your business will work. After a few discourses and just a little-printed material, you’ll have an agreement that can spare you from potential fights in court and huge issue later on.
Do you have all these clauses in your business agreement? Do you have anything else to add? Feel free to share your thoughts in the comment box below.