Partnership Agreement Drafting

Going into business can be one of the most important endeavors a person undertakes. That way there may be a business partnership. A business partnership is an important association of two or more persons (or entities) who form a legal relationship through a written agreement to carry on business but retain personal liability for the endeavor.

The business structure, responsibilities, and liabilities laid out by the agreement between the parties are critical to ensure the success of the endeavor. Since each partner in a business is responsible for the actions of the other partners, business legal expertise is essential from the start.

A properly drafted, business partnership agreement (also called a "partnership deed") protects all parties and provides a fair method for resolving disputes and disagreements; It also outlines the process required to reform the working relationship or dissolve the business altogether.

Business Partnership Agreement

A business partnership agreement is a legal document between two or more business partners that explains the legal structure and purpose of the business. It outlines the following information:

• Responsibilities of individual partners
• Capital contribution
• Partnership property
• The ownership interest of each partner
• Decision-making sessions

The agreement also outlines the steps to be taken if a business partner decides to sell their interest or leave the company and how the remaining partner or partners will divide profits and losses.

Drafting of A Business Partnership Agreement

A business partnership agreement must cover all the immediate issues related to the co-management of the business. The easiest way to create a business partnership agreement is to hire a lawyer or find a customizable template.

If you're writing your contract, find a template for a company similar to the business you're starting.

A business partnership agreement should follow the process and include the following information:

• Business Generality

Start by stating the name of the business, its legal structure, and its location of the business (i.e., which state's laws will govern it).

• Business Operations

State the purpose of the partnership and explain what activities the business will and will not engage in.

• Ownership Equity

Write the percentage of the business each partner owns. Enumerate the rights and responsibilities of each partner.

• Decision-Making Process

Explain how decisions are made and the responsibilities of each partner in the decision-making process. It includes who takes financial control of the company and who approves the addition of new partners. Also include information on how profits and losses are shared between the partners.

• Liability

If the business partnership is set up as an LLC, the agreement should limit the liability each partner faces in the event of business litigation. To do so effectively, the partnership agreement should be accompanied by other documents, such as articles of incorporation. A business partnership agreement alone is not sufficient to fully protect partners from liability.

• Dispute Resolution

Any business partnership agreement should include a dispute resolution procedure. Whether you work with family or best friends, disagreements are common in business.

• Dissolution of Business

If one or more partners choose to dissolve the business, the business partnership agreement should outline how that dissolution will occur. Partners should explain the procedure for joining or leaving the partnership. It has to outline continuity or succession planning for partners leaving the business.

Elements Including Under Partnership

The essential elements of a partnership business agreement are as follows:

• Legal Business

The term "business" includes all trades, businesses, or professions. The purpose of the partnership agreement is to carry on a legitimate business and nothing else.

• Business Name

A partnership firm must have its name. The name under which the business is going on. It is called a "Firm Name".

• Association of Persons

There is a limitation to partnerships about members. A minimum of two persons are required to form a partnership. The Indian Partnership Act is silent on the maximum number of members. The Indian Companies Act provides a maximum number of members in the case of banking business and twenty members in other cases.

• Profit Motive and Profit Sharing

A partnership business is formed to make a profit. The profit earned will be distributed among the partners as per an agreed ratio.

• Contractual Relationship

A partnership is a contractual relationship between persons capable of entering into a contract. The relationship between partners is not created by status but by contract.

• Mutual Trust and Confidence

The successful functioning of a partnership depends on the mutual trust and confidence of the partners. Partners have to exercise utmost good faith in business dealings.

• Principal-Agent Relationship

Not all partners need to manage the easement. Any one or more partners can carry on the business on behalf of all the partners. Every partner is an agent of the firm and his activities bind that firm.

• Restriction on Transfer of Share

It is compulsory to take prior consent from all the other partners to transfer their share in the partnership. Thus, the partner cannot transfer the interest at will.

• Unlimited Liability

The partnership has the basic principle of unlimited liability. The personal property of the partners may be attached to meet the claims of the creditors of the firm if the assets of the firm are insufficient to meet the claims of the creditors.

Tips to Avoid Mistakes in Business Partnership Agreements

Partnership agreements are complex documents. Unfortunately, many people get bogged down in the details and make critical startup mistakes in their partnership agreements.

Here are some common mistakes to avoid:

• Missing Key Details

Partnership agreements usually include some complicated language about specific topics, and people can skip out if they don't understand the language. Don't assume that just because something reads like fine print, it doesn't have to.

• Believing Things will Work

People go into business with people they like and trust, thinking that they won't have problems later. A partnership agreement exists to address these issues when they inevitably arise.

• Not having the Contract Reviewed by an Attorney

Partnership agreements can vary by state and industry. Also, laws and best practices are constantly changing. If you choose not to have a power of attorney draft your contract, at least review it before you sign the document.

• Will not Modify the Contract Later

Partnerships evolve and governing documents must be regularly updated to reflect the changing business. Otherwise, there may be problems that the document cannot resolve.

• Not Forming Separate Partnerships for New Ventures

Building a business is expensive and time-consuming. Sometimes when a partner comes up with a new business idea, their first thought is to make it part of their existing partnership.

However, it prevents the partners from apportioning their liability. Often, their existing partnership agreements are not structured to govern new and different businesses.

A business partnership agreement formalizes the relationship between the partners and enumerates their rights and responsibilities.

• Need for Business Partnership Agreement

A business partnership agreement establishes an agreed-upon set of rules and procedures that owners sign and agree to before problems arise. If any challenges or disputes arise, the business partnership agreement defines how to resolve them.

In other words, a business partnership agreement protects all partners in case things fall apart. By agreeing to a clear set of rules and principles at the outset of the partnership, partners exist on a level playing field developed by consensus and supported by law.

• Conclusion

Drafting and properly drafting a business partnership agreement will take some time, but trying to resolve issues arising from a business with no partnership agreement or poorly written business partners can take more time, energy, and resources than one would have ever imagined. He ran the business in a way he never imagined.