There are various forms of business structures. You can trade as a sole proprietor, assuming absolute rights, responsibilities, benefits, and downsides. Similarly, you can strike a partnership deal or incorporate a company alongside like-minded partners.
If you opt for a business partnership, you should have a comprehensive contract outlining the rights and responsibilities of each partner. That way, you’ll keep confusion at bay and have a formal framework to settle arising disputes.
Discover what a partnership agreement entails and the key aspects to include in the agreement.
Essential Aspects of a Partnership Agreement
A partnership agreement or article of partnership is a written contract highlighting business practices and contractual obligations of business partners. The document clearly defines the partners, their responsibilities, and ownership stakes in the business.
- Financial Contribution
- Dispute Resolution
- Exit and Entry Clause
- Death or Incapacitation
- Duration of the Partnership
Articles of partnership may be unique across the board but cover specific issues. They contain the following key aspects:
A partnership requires substantial capital because you’ll need money to start up, pay utilities, buy stock, and reimburse staff. A financial obligation clause highlights how much each partner will raise for the capital and accruing expenses.
Although cash forms most contributions, skill sets, assets, and securities could also form valuable capital contributions. Generally, a partner’s contribution will determine their ownership percentage and how much everyone will part ways with when the company dissolves.
A business requires intensive labor input to stay afloat. For this reason, your agreement should define the partners’ duties, specifying key roles, decision-making abilities, shared responsibilities, and hierarchy. The clause should also determine the steps to solve performance-related conflicts in the business.
Businesses worldwide aim to make profits, and partnerships are no exception. After trading consistently, you’ll make some profit, but how will you share it? Therefore, it would be best if you decided beforehand how much each partner will draw from the business proceeds.
Many partners exclude dispute resolution from their agreements. However, a good agreement should elaborate on how you’ll handle partner disputes. For instance, you can hire an arbitrator or delegate the task to an advisory board. Whatever method you choose, ensure you capture it in the contract for future use.
A partner may decide to quit the business to explore other opportunities. An exit clause should therefore be in place to prevent unexpected gaps following the exit. On the other hand, you should also have an entry clause outlining how to admit new partners, how they’ll be paid, and their responsibilities when joining the business.
Articles of partnership should specify the rules for handling the death of a partner. A common practice is maintaining a life insurance policy designating co-partners as potential beneficiaries. Alternatively, you can adopt a buy-sell agreement allowing for the business valuation and sale.
Most partnerships operate for an unspecified duration. However, you can deviate from the norm and design a business life cycle. You can then dissolve the business, having operated for the specified duration or after achieving a milestone
An unclear partnership agreement or its absence may affect business performance. That’s why you should draft the vital document before starting your business. Although drafting a partnership agreement can be complicated, an expert can help you streamline the process. Begin by acquiring a tailor-made partnership agreement at Forms. Legal today.