Are you thinking of forming a partnership business with your best friend? If you are, then it is a great idea. Partnership businesses share profits and losses, reducing the burden on each partner. However, you need to make sure that you draft a proper partnership agreement. In this litigious society, you can never trust anyone and when things are in written in black and white in the form of an agreement, it builds a secured as well as healthy partnership.
No matter for how long your best friend has been with you, you must always form an agreement between the both of you. It is necessary because it outlines what each partner can get in return, what you can expect from them, how much profit and loss they share and so on. Providing you a firm understanding about the business relationships, the rights, responsibilities, important rules and regulations and determination of other things in between partners, an agreement will spell out each and everything for partners to avoid future discrepancies.
Let’s have a deep insight on the partnership agreement.
A partnership agreement is a written agreement between two or more than two people who wish to join as partners and to conduct a business to earn profits. Generally, a partnership pact contains the nature of business, rights and responsibilities of the partners and their capital contribution. Partnership businesses can also be formed without an agreement but it is always good to be prepared. In fact, a partnership business becomes a valid partnership business with this agreement.
A partnership pact permits you to understand and structure your relations with your partners. Also, it provides you proper understanding of the business relationships that you will be having with your partner in the business organization. Since you will be able to make a pact with your business partner, you will be able to write an agreement that is in mutual agreement with your partner.
Forming an agreement is essential because it will determine the rules and regulations with respect to the partnership by your state. Normally, these rules are known as The Uniform Partnership Act, hence controlling your partnership business. In addition to this, these rules make easier for you to function. They also let you plan out other things as well. A business partnership agreement can also be customized for your ease.
There are some standard items that are included in an agreement, called The Uniform Partnership Act. However, as mentioned above, you can always customize your agreement as per your requirements. The standard rules and regulations are applied to all partnership businesses controlling several aspects of your business. Also, these rules are ‘one size fits all’.
The Name of the Partnership Business
One of the most important things in any agreement is writing the name of the partnership business. You can choose the name of the business based on your name, such as Wesson & Smith. You can either use your last names or adopt a fictitious business name such as Smith Home Repairs but before choosing a name for your partnership business, you must make sure that the name of the business is not already in use by any other company. Ensuring this will help you file the business name easily without any hassle or else, you may get stuck in the process.
Contributions of the Partners
Next in the list comes the contribution of the partners. This part is kind of critical and you and your partner might find it difficult to calculate the contributions made by one another. Thus, you need to decide things beforehand. Therefore, in this section, you have to mention how much cash, services or properties you will contribute to the business. Also, what will be the amount of ownership percentage each partner will have. Disagreements over the contributions have doomed many businesses to failure but a mutual agreement has resulted in a successful business relationship.
Sharing of Profits and Losses
In this section, partners have to decide whether or not the profits and losses will be allocated to the partner’s percentage interest in the business. Also, the distribution of profits and losses will be decided, which could either be distributed at the end of the year or on a monthly basis. Depending upon the needs, the distribution of profits and losses are shared. Both partners may have different needs and ideas and that is why it should be divided, keeping in view both the perspectives.
Making decisions among partners will require you to coordinate. Business partners often take a common vote for deciding over business decisions. This usually happens when partners need to decide over a big and very important decision. They leave the minor decisions to be taken by individual partners on their own. Therefore, your partnership agreement will have to determine on what basis the minor and major business decisions will be decided. You must carefully think over issues like these before making important decisions.
Partners can either inform the other partners about their act or act without their consent for the business. This entirely depends upon your decision written in the agreement. If you want your partners to take decisions regarding the business on their own, you must state clearly that individuals are permitted to do so. While this is uncommon because partners really want to be informed prior to any act of the partnership businesses no matter what your decision is, you must clearly state everything in the agreement.
The duties of every person in the partnership business are essential to maintain but spelling out each and every single detail in the partnership agreement may not be a good idea. Therefore, you must dictate important activities such as keeping books, corporate minutes, accounting details, dealing with customers, negotiating with suppliers and supervising employees in the agreement. You should mention a bit about these activities and must make sure everything is covered under it.
New Partner’s Admission
When partners feel the need, they may find the need to expand the business and bring in new partners. Admitting new partners has an appropriate procedure. All partners must agree over the procedure and admit new partners. Agreeing over the way of admitting partners in the agreement will make your lives quite easy.
Death or Withdrawal of Partner
Just like the providing the rules to the new partner is necessary, the withdrawal or death of the partner also essential. The rules for handling the departure of a partner are different compared to the rules regarding the incorporation of one. Partners may either set up a plan in case of the departure of the partner or simply, no matter what it is, mention the rules in case the partner has withdrawn or passed away.
If an issue between partners causes problems among you all, would you straight away go to the court or sort it out on your own? The decision about resolution of disputes must be mentioned in the agreement too so that matters can be resolved in the future.
If you are forming an agreement for your business, then it will be called a business partnership agreement. On the other hand, if you are forming a partnership pact for sole owner businesses, then it will be called a general partnership agreement. Regardless of the type of business, you will be able to find several sample partnership agreements on the web, download them for free and to avoid making mistakes by making an agreement on your own.
While there are several types of agreements, here are a few you need to know of;
This is a type of agreement between partners which binds them to work together in a collaborative way on the regional, global or national level and to achieve the common objectives. In this type of agreement, partners mention that they wish to share their resources with other partners.
It is a legal agreement between partners, binding them together to achieve a common program result through a defined strategy. In this type of agreement, partners declare to share the resources, responsibilities, risks and results. Also, the agreement highlights the budget and plan. When mentioned in the agreement, the resources are shared among partners to help them in carrying out their roles. As per the agreement, both the partners have specific capacities and advantages to perform the roles.
This is another type of agreement which binds partners to achieve the common program results on the basis of a defined strategy, with shared resources, responsibilities, risks and results. This form also involves a specific budget and plan. In addition to this, resources are also transferred to the partner to aid them in carrying out the functions. Having unique capacities and advantages, partners are able to perform the functions.
When you start a partnership business, it becomes essential for you to form a partnership agreement template. Here are certain steps that will help you form the pact easily;
Step # 1: Understanding the Uniform Partnership Act
When you do not form an agreement, your state will provide you with the default rules for the partnership business. The main purpose of the partnership agreement is to customize those default rules and make up your own.
Step # 2: Meeting Other Partners
Now that you have read the default rules for the partnership business, it is time to meet your partners and discuss important things. You need to discuss about the purpose of the business and identity the start up cost to start the business. Later, you need to mutually understand the division of profits and losses. In addition to this, you need to decide on the liability and debts too. The person responsible for the decision making must also be discussed among all of you. Such matters must be discussed among partners to avoid future issues.
Step # 3: Making an Agreement
Now that you have discussed all the important things with the partners, it is time to make the agreement. The things that you need to write in the partnership agreement are written below;
Step # 4: List the Capital Contribution
Often, partners provide unequal resources in the beginning of the partnership. Therefore, it is necessary to provide the list of the partnership by share of capital contributed. The amount each partner will contribute and get must be listed in the partnership list.
Step # 5: Identification of the Partnership Property
Now that you have mentioned the capital contribution, you need to identify the partnership property. Properties purchased by the partnership business solely belong to the partnership business and partners must only use it for business purposes. You need to mention this clearly in the pact.
Step # 6: Allocation of Profits and Losses and Decision Making
The distribution of profits and losses is entirely based upon the percentage of the business startup. However, if partners wish to use some other percentage, they must mention it in the. In addition to this, the partners must also decide upon as to who will make the decisions. Partners must be made responsible to decide over the small or big decisions.
Step # 7: Future of Partnership
The future of the partnership business must be explained by explaining the process of admitting new partners. Also, you must mention what will happen if the partner dies or withdraws from the partnership. There must also be instructions in case of dissolution of the partnership.
Step # 8: Finalize the Agreement
In the final stage, you need to pick the law which will govern the agreement and get it signed by the relevant authorities.
If you want to save your time and avoid mistakes by making the pact on your own, you can download sample partnership agreement for free from our website.
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