One of the first steps you are best advised to take when entering into a business partnership is drawing up a business partnership agreement.
This applies to businesses operated by two or more parties and although it can be drawn up at any stage during the company’s lifespan, it is best written before problems or conflicts arise.
How a partnership agreement helps your business
A business partnership agreement sets out the provisions surrounding profits and shares and what percentage each partner takes. It further outlines each party’s responsibilities so that you are covered when a dispute emerges.
It is in addition to the Partnership Act 1890, which is a one-size-fits-all approach to partner protection. Under this Act, all partners are entitled to share the profits equally. This may not suit a company where one party has invested more in the project than the other.
Another stipulation of the Act is that all partners are jointly liable for mishaps incurred by the business. This is again problematic where one party incurs more detriment than another.
It further states that any party can terminate the partnership at any point just by giving notice to other relevant parties and the business partnership is dissolved if a partner dies.
Similar provisions cover how much say each party has in the running of the company and, as such, it becomes increasingly clear why this Act can be too general for many companies.
Meanwhile, a business partnership agreement gives you the freedom to determine who is responsible for what, and how much profit each interested party is entitled to.
Under this agreement, you also have the opportunity to decide when and how profits are paid according to what suits the needs of all the interested partners.
It also helps you determine what will happen to the company if one party leaves, while taking into account who should take the brunt of losses, where necessary.
How to draw up a business partnership agreement
The first step in drawing up a business partnership agreement is deciding upon a name for the company, before which you should ensure that the name is not already taken.
Next, you must outline who will contribute cash, property or services to the company before it opens. It is at this point that you will decide what ownership percentage each party will have.
You must then decide if profits will be divided according to the percentage stake each partner has in the business. Consider which party, perhaps all, will be entitled to a regular draw, or whether profits will be handed out at the close of the financial year. This is of particular importance because profit is an area where disputes often occur.
If you want to counteract the stipulation in the Act that says any partner can bind the partnership without the consent of the other parties, you must put this in the agreement. Otherwise, the rule stands.
Decision-making is paramount in business and just what constitutes a big or small decision can be an ambiguous process. As such, your business partnership agreement should make clear what big and small decisions are, as well as how decisions should be reached. You might, for instance, decide unanimous decisions are appropriate for bigger matters, while each party can take the initiative on smaller issues.
Management duties have to be met and just who takes on which responsibility is important to outline. It may seem obvious who takes care of customers, but it is still best to put this in your agreement to cover all bases.
The agreement should also determine an admission process for new partners, as well as detailing the process for the departure of a party. The latter should include a reasonable buyout scheme.
Lastly, when a problem does arise, you need to decide what the best tactic for overcoming it is. As such, set out in your agreement whether arbitration or mediation should be employed to avoid going straight to the courts.
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Published on: November 21, 2011