A formal partnership agreement is a prudent investment, but not a compulsory one. It is not required to form an association, especially in a kind of set up business between two or more people that is not a limited company. However, if you wish to avoid uncertainty and problems, it is best to have a formal partnership agreement.
What happens if we don’t sign a Partnership Agreement?
The provision of the 1890 Partnership Act often takes the place in the absence of a written consent. The partnership act states that all partners are equal and share profits and losses, start-up and running costs as well as the workload equally. This law seeks to equate all partners and offer an equitable workforce and framework for running the business. This partnership act also implicates the following:
- Any partner can end the partnership to an end by just giving the others notice. The association automatically ends when one person dies.
- Partners are made to collect an equal amount of the profit, despite how much capital, manpower or skill they bring into the business. Decision making takes a long time because all partners have to be involved.
- Disputes can break out since all partners have an equal say in the decision-making. If the partners don’t agree together, arguments could get out, damaging the business.
- A partner may enter into contractual and financial arrangements which may not be good for the enterprise, but will be binding to the other partners because all partners are considered agents and can act on behalf of each other.
- All partners handle the debts incurred by the company. If a partner owes a debt, the creditor can force the other partners to pay the debt provided the debt incurred was on the company. Also, if a partner fails to deliver his commitment or duty, his partners can be held to fulfil the commitment.
- If a partner should get into financial debts the creditors can hold the other partners to pay the debts.
What benefits will a Partnership Agreement offer?
A partnership agreement usually carefully drafted will ensure that the rights, responsibilities, profit ratio, rules associated with entry and exit into the business, the grounds which the partnership can be terminated and which disputes should be settled. It also guarantees that all partners have a common goal and vision for the business. More important, a partnership agreement would help prevent misunderstanding and conflicts.
Important issues that should be included in your partnership agreement includes:
- The profit and loss ratio, that is, how profits and losses should be shared among partners.
- The level of performance that should be expected from every partner, as well as their various responsibilities.
- If partners are allowed to engage in other business activities or make a full-time commitment to their business.
- The management of the partnership.
- On what grounds can a partner be expelled from the partnership.
- Ownership interests, while taking into account any loans, assets, investments or cash made by each individual partner.
- Procedures to be followed if a partner wants to leave and if a new partner wants to be admitted.
- Whether partners are allowed to sell their shares in the business to outsiders and if they are allowed, how will their shares be valued.
How do I put a Partnership Agreement in place?
There are many available internet sites that offer apparently cheap partnership agreements, this can be false for many reasons:
- Two corporations can look alike in terms of the precise requirements.
- Without a legal advice, there is no sure way of knowing if the agreement is by the partnership laws.
- The harmonious agreement can hardly be reached without disputes erupting except there is an impartial third party.
- The appropriate type of partnership would have to be chosen that would be appropriate for business. Three kinds of partnership are available; limited liability partnership, limited partnerships and general partnerships
A great way to save money is to have a meeting with the other partners and assemble a list of provisions you think should be included in your partnership agreement before calling your lawyer, for legal advice. Your lawyer would elucidate your requirements and draft an agreement that would benefit all the partners. However, all partners should have their own lawyers to review the final version because one lawyer cannot protect the interest of each partner.