Starting A New Small Business- What Type Of Things Do I Need To Include In A Partnership Agreement?

Business relationships are often so fraught that you and your partners attitude can never be gauged

. Disagreement on small issues leads to dire situations. Failure to spell out rights and responsibilities in a written partnership agreement results in conflict between partners and situation often blow out of proportion. In addition, without a written agreement states law will control many aspects of your business.

Dont be tempted to leave the terms of your partnership up to these state laws. Because they were designed as one-size-fits-all fallback rules, they may not be helpful in your particular situation. Its much better to put your agreement into a document that specifically sets out the points you and your partners have agreed on.

A partnership agreement allows you to structure your relationship with your partners in a way that suits your business. You and your partners can establish the shares of profits (or losses) each partner will take, the responsibilities of each partner, what will happen to the business if a partner leaves and other important guidelines.

The 1890 Act codified and clarified the existing common law rules of Partnership as they existed in Scotland and in England. As per Section 1 of the 1890 Partnership Act defines Partnership

The relationship which subsists between persons carrying on a business in common with a view to profit

What should be the traits for a successful partnership?

Before entering a business venture, stakeholders should conduct a swot analysis of all the elements which constitutes an organizational internally. And in this case partners need to analyze their strengths and abilities in order to carry out the partnership. Following are some points which can help identify the strengths of a new organization.

Mutual confidence and respect among the partners and a high level of information exchange;

Strong agreement among partners on a clear and simple vision and a set of outcomes that will help their core business

Clarity in the minds of all partners regarding their roles.

Use of innovative tools (e.g. the Performance Management System) and models to identify the needs of the area which need attention of decision makers.

Professional management and co-ordination by the coordinators, leaders of the partnerships and members of the partnership board;

Sufficient resources to maintain and support the partnership (the necessary start-up funding)

Good communication and public relations for reporting successes.

What to include in your partnership agreement

Heres a list of the major areas that most partnership agreements cover. You and your partners-to-be should consider these issues before you put the terms in writing:

Name of the partnership.

One of the first things you must do is agree on is the name for your partnership/business. Then again it depends on personal discretion, but legally repetition of copyright names is against the law.

Contributions to the partnership.

A distribution mechanism of profits and liabilities need to be recorded. Not just that workloads and equity funding along with asset ownership issues need to be agreed upon before the opening of business.

Allocation of profits, losses and draws.

It is important to answer crucial questions of profit and loss questions before hand. Will profits and losses be allocated in proportion to a partners percentage interest in the business? And will each partner be entitled to a regular draw (a withdrawal of allocated profits from the business) or will all profits be distributed at the end of each year? You and your partners may have different ideas about how the money should be divided up and distributed, and each of you will have different financial needs, so this is an area to which you should pay particular attention.

Partnership decision-making.

It is good to sort out the captain of the ship in order to avoid confrontation of all the stakeholders. Although theres no magic formula or language for divvying up decisions among partners, youll head off a lot of trouble if you try to work it out beforehand. You may, for example, want to require a unanimous vote of all the partners for every business decision. Or if that leaves you feeling fettered, you can require a unanimous vote for major decisions and allow individual partners to make minor decisions on their own. In that case, your partnership agreement will have to describe what constitutes a major or minor decision. You should carefully think through issues like these when setting up the decision-making process for your business.

Management duties.

Normally you will not work out procedures on every management detail, but youd be wise to work out some guidelines in advance. For example, who will keep the books? Who will deal with customers? Supervise employees? Negotiate with suppliers? Think through the management needs of your partnership and be sure youve got everything covered.

Admitting new partners.

Eventually, you may want to expand the business and bring in new partners. Agreeing on a procedure for admitting new partners will make your lives a lot easier when this issue comes up.

Withdrawal or death of a partner.

At least as important as the rules for admitting new partners to the business are the rules for handling the departure of an owner. You should set up a reasonable buyout scheme in your partnership agreement.

Resolving deadlock disputes.

If you and your partners become deadlocked on an issue, do you want to go straight to court? It might benefit everyone involved if your partnership agreement provides for alternative dispute resolution, such as mediation or arbitration.

Termination of partnership.

It is difficult to bring a partnership to an end without at least some unhappiness. It should be possible to avoid unnecessary friction, which is in the interest of no one. Litigation between warring former partners is far too common. What should one do? There should be agreement in the partnership contract for termination on a suitable period of notice but it is much better if one talks the thing through and reaches agreement as amicably as possible.

Restrictive Agreements.

For business which involves utmost secrecy of data, you need a mechanism to bare departing partner to keep a mum on organizational secrets. But If a partner leaves should there be restrictions on where he may go? Personally I believe one should never attempt to deprive a fellow professional of the ability to make a living and a restrictive covenant should not be necessary in legal partnership agreements.

What should the effect of a notice be?

Some agreements provide that if a partner gives notice other partners have the opportunity of buying him out. But what if all of the partners are unhappy with one particular partner? Should they be able to put him out and acquire his share in the partnership? Should the intention be to protect the individual or the practice itself? Should there be special protection for the partner who is indisposed.

How long should the partnership agreement last?

By definition a business is defined as a process which longs till it is not called off. So reality check suggests negative response to this idea. But for sake of your satisfaction you can add this as well provided if you are insecure about the business. Then again whats need of starting a business if you yourself are not satisfied?

A well documented partnership agreement , at the start of your business, makes sure that all partners have a clear line of action. Net Lawman offers such comprehensive agreements that cover all provisions necessary.

by: Clark Taylor

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