All you need to know about the Partnership Agreement

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All you need to know about the Partnership Agreement

Planning avoids expensive court disputes later. Regardless of how good your relationship is with your partner while entering into a partnership, you should take into account a legally shaped partnership agreement. The article highlights all you need to know about the Partnership Agreement.

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Partnership Agreement

Legally, you can still create a regular partnership agreement by shaking hands, but it is not wise. Like other relationships, the partnership is full of opportunities for disagreement and misunderstanding. Once you have entered into a partnership agreement with someone, you are legally bound to the terms of the agreement until the partnership relationship is officially dissolved.

Through a partnership agreement in writing to formalize your joint venture saves personal grief as it makes you and your partner(s) agree on how to handle certain situations before they arise. It will make the day-to-day running of your partnership smoother and prevent problems from growing into full-blown problems.

Features of the Partnership Agreement

If you do not have a partnership agreement, the business may be in jeopardy if the partner is no longer able to participate. This binding document must consist of all the terms and conditions that apply towards the commission of the partnership. While you may be tempted to rely on a handshake agreement, doing so means that you may lose some of your fortunes in the event of a disaster, such as leaving a business. A business attorney can help you draft a partnership agreement that takes into account all emergencies.

Prohibition Agreements

The clauses in the agreement are framed to prevent certain actions of partners to achieve the best interests of the business. The main types of restrictive agreements are non-binding, non-discriminatory, and non-competitive, and your partnership agreement must include all three. With a non-competitive agreement, a partner leaving the business may not start or operate a competitive business for a while within the boundaries of a particular area. Non-disclosure protects confidential information when a partner leaves the business; he or she will not disclose this information to others or use it to discredit a partnership. Unsolicited contracts prevent a partner from stealing customers on the go.

Buy-Sell Agreement

These provisions may be a separate agreement or incorporated as a clause in a partnership agreement. The purchase clause directs how the partnership will remain consistent if the partner is unable to work or dies, if the partnership declines, or if the divorce affects ownership. It can also provide guidelines to follow in the event of a collapse.

Having a strong purchase agreement prevents partners from making decisions in the event of an emergency. You should include guidelines for establishing a business value, how the purchase price should be paid, and whether insurance is available to cover part of the purchase price.

Things to address in a partnership agreement

  • Include contributions: Make sure you clearly put each part of your partner in the formation and running of the business finances. In your agreement, specify what each partner will contribute — not only in terms of cost, but also in terms of time, effort, customers, resources, etc.
  • Distribution: You are all in the business of making money and creating and supporting a comfortable life. Your partnership agreement should specify how our partners will split the profit for your business? How much will each partner be paid and who will earn first? You can not only say how the profit will be distributed, but also explain how each partner will be paid (and how much that income will be).
  • Ownership: Your agreement should specify how ownership interests will be handled in a variety of circumstances, such as the death of any spouse, retirement, or bankruptcy. And in order to protect your business from leaving a partner, setting up a new company, and stealing your customers, you should also consider adding a non-competitive clause.
  • Decision Making: Hopefully, you and your partner will not agree wholeheartedly about everything. You need to explain how daily management and long-term decisions will be made. Who gets the last word? Indicate what types of decisions need to be agreed upon by our partners, and what decisions can be made by one partner. By setting up a decision-making framework that everyone understands and approves, you will have a foundation for a non-controversial business.
  • Dispute Resolution: If things get bad between partners, how will conflicts be handled? Your partnership agreement should describe the settlement process. Should mediation be the first step? Will you need to mediate to resolve the conflict? Remember that when a dispute goes to court, the cases become part of the public record. Setting up a way to handle a dispute will put an end to speculation.
  • Critical Development: Sometimes, the unexpected happens. That is what makes the business so exciting — and not so intimidating at times. Your partnership agreement should address potential issues and concerns such as buyout, sickness of partners, retirement provisions, etc.
  • Dissolution: Your agreement should also include steps that you can take to end the partnership. You can choose to do this if you and your partner can agree on the future of your business.

How to make a partnership agreement?

One of the blunders which small business owners make is not having a partnership agreement. There are many resources to make your partnership agreement. In extreme cases, you can contact a business attorney for assistance. There is no alternate for personal legal advice from a lawyer. For example, if you have more than two partners or if your partnership has a high value for the property, it is probably best to get the help of a lawyer. An attorney or lawyer is best suited to ensure that your agreement displays in legal clauses what you and your partners may have agreed to verbally.

Each partner must sign a partnership agreement to be binding on everyone. In most cases, electronic signatures are as good as portable signatures. You should also distribute an electronic or visual copy of the agreement so that each partner can keep and maintain it among important business records.

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Final words

Since partnership is a complex issue, we always recommend that people have partnership agreements compiled by attorneys or other legal professionals who can explain more about partnership matters and ensure that the partnership agreement is what it has to say. A business partnership agreement establishes clear rules for business operations and the roles of each partner. They are made to resolve any disputes that arise, as well as to specify obligations and how the profit or loss is distributed. This legal document can provide valuable guidance in the most difficult of times.  There is a misconception about the partnership agreement that it involves litigation which would be tedious work but it is not like that. This blog would help you understand all about the partnership agreement.

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Neelansh Gupta is a dedicated Lawyer and professional having flair for reading & writing to keep himself updated with the latest economical developments. In a short span of 2 years as a professional he has worked on projects related to Drafting, IPR & Corporate laws which have given him diversity in work and a chance to blend his subject knowledge with its real time implementation, thus enhancing his skills.

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