A partnership is a form of business where there are two or more people involved. Now coming to the partnership agreement, there are several terms you need to keep in mind.
If you are willing to start a partnership business, then you must take these things into account; otherwise, there will be a lot of problems and conflicts between the partners.
So in order to make things a little easier, you need to know the key features of the partnership agreement. In this article, I will be telling you some of the key terms that a partnership agreement must include.
I am a business owner myself, and the business I do is a partnership business. But before delving deep into the terms and conditions of a partnership agreement, let us know what partnership is and how it works.
As I mentioned in the introduction, it is a form of business where the profits and losses are shared by two or more people.
The liability limit is usually set only up to the amount the partners invest. There are mainly four variations in partnership. They are
- General Partnership
- Limited Partnership
- Liability Partnership
- Limited liability limited partnership
Now to let us look at the terms and conditions that must be included in a partnership agreement.
What Is The Importance Of A Partnership Agreement?
A partnership agreement legally binds the partners by outlining the day-to-day business activities. It also mentions the rights and duties of all the partners. There are certain things which you should definitely consider including. These are:
- Name and Address Of Business – The name and the address of the business should be clearly mentioned in the agreement.
- Voting Rights – The rights of voting should be clearly mentioned in the partnership agreement.
- Type Of Partnership – You already know the four major types of partnership. The general partnership agreement must also mention what kind of partnership your business follows.
- Management and Control – The agreement of partnership must also include who controls and who manages the business
- Liabilities Of partners – The extent of liability for the partners should be specifically mentioned in the agreement.
- Information and Contribution – The information and contribution of the partners should be clearly mentioned in the agreement.
Terms And Condition Of Partnership Agreement
These terms and conditions ensure that there is no conflict between the partners. Do note that partnership agreement varies from business to business. However, the terms and conditions that I am about to list down are the same in all kinds of the partnership business.
1. Distribution Of Profits And Loss Should Be Mentioned
This is the most important term that a partnership agreement must include. In most cases, there is a 50-50 division of profit and loss, but it also depends on the amount that partners invest.
It is very important to have the distribution of profit and loss mentioned; otherwise, serious complications can arise in the business. Apart from just distribution, a partnership agreement must also specify when the profit can be taken out of the business.
2. Decision-Making Process Should Be Mentioned
A partnership agreement should clearly mention who is in charge. In most partnership cases, problems arise because of the confusion of who should make the decision. If you are entering into partnership business, I would highly suggest you have a voting system to decide who should make all the decisions.
Apart from the mere decision-making process, it must also include the guidelines to resolve a problem if one arises. All this can be done with the help of the clause of mediation which is provided in the agreement.
3. Ownership Percentage Should Be Mentioned
A partnership agreement must include the percentage of ownership. Ownership is mainly decided by how much one partner invests in the business. The more one partner invests, the more likely he is to be the owner. This doesn’t just here.
The percentage of ownership also depends on several other factors like contributions made by the partners to buy the equipment and other assets that are to be used in the business. All these factors are taken into account for deciding the percentage of ownership.
4. Partner Authority Should Be Mentioned
The authority of both partners should be clearly mentioned in the agreement. Handling a business is a very challenging task to do, and things like taking debts or signing contracts can at times put a business at serious risk.
There needs to be one partner who is competent enough to make those decisions. In the form of agreement, the name of the partner who holds the maximum authority should clearly be mentioned.
5. Rules Of Withdrawal And Death Should Be Clearly Mentioned
Life is unpredictable, you never know when your partner is going to die, so it is mandatory to ensure that the rules concerning death and withdrawal should be specifically mentioned in the partnership agreement.
This can include the buying and selling options, the process of valuation, and the specificities of life insurance policy if there are any. To be sure, get a free printable partnership form.
6. Rules Related To Compensation Must Be Mentioned
Unlike corporate employees, partners do not receive salaries; they rather receive compensation for their contribution to the business. So how much compensation a partner is receiving should be clearly mentioned.
Do note that unlike salaries, compensations are not guaranteed payments. They are only given when the profit of the companies is in excess. If there is a provision for guaranteed payments, then ensure that is mentioned too in the agreement.
Final Thoughts On Partnership Agreement
There you go, now you know everything about partnership agreements. I hope that this article has given you clear insights into the nitty-gritty of the agreement of partnership.
I hope you have found this article to be informative. If you have some further questions or comments, I would like to ask you to post them in the comment section down below. For more information, stay tuned to Lawyers Inventory.