Five Vital Clauses in Every Partnership Agreement
Some parts of starting up a partnership business can be fun, such as designing a logo and planning for the future of the business. Other things like writing an agreement are not fun at all. Business partnerships have its ups and downs, just like any other personal relationship. Therefore, before you enter into a partnership relationship, make sure you have a partnership agreement that highlights the legal liability, duties, and financial obligations of each partner. You might be enthusiastic at the beginning of the partnership, but it is vital that you put in paper anything you agree on with your partner. An exclusivity clause is part of a partnership agreement, which restricts partners from selling, promoting or buying services or goods apart from the issuing company. Most business people who are getting into a partnership agreement overlook this clause without the knowledge of the fines and penalties for violating the provision. Here are things that every partnership agreement should contain.
A partnership agreement must document the capital contribution given by each partner. The clause ensures that the exact amount of capital contributed is written down, as well as when it was committed. Besides, you need to know what happens if the capital contributed runs out. Some options available in case the capital runs out include closing the doors of the business, contributing more capital, or turning to other resources for funding. Partners need to avoid waiting until they face financial downturns or money runs out for them to consider this clause.
The capital contributions clause should also highlight the percentage of ownership interest taken by each partner. The rate of ownership is based on the contributions from the partners. You can search for an exclusivity agreement template to get an idea of how it should be documented. Cash is usually the most common type of contribution in most partnerships. Some partners contribute a considerable cash amount without being active in the business, while another one might invest in cash but work in the venture on a full-time basis. Other forms of legitimate business contributions in partnerships include:
- Certain skills
Decision making in businesses is like making decisions in committees; it is never effective. By the time the board is making a decision, the opportunity has already passed. That is why it is essential to decide on who you will be making decisions to avoid delays or wrong decision making. It often stalemates a business, which can cause business failure. Therefore, the decision-making clause is a vital one for every partnership agreement. You should come up with a decision-making procedure early enough before you even commence business to ensure that operations run smoothly.
When creating the decision-making clause in your agreement, you should discuss and decide the procedure of making decisions, especially in situations where the issue is delicate and cannot be agreed upon on consensus basis. You can consider having a protocol in your partnership business where the management concurs on way forward when the agreement is not applicable.
Death and disability
It appears improbable, but bad things happen, and partners ought to be prepared. You might have to deal with the disability or death of partner if you have been in business for long. If you fail to have these measures in place, the heirs of the deceased or disabled could force the other partners to liquidate the venture. Wills, insurance, and trusts come in handy in this partnership agreement clause. Therefore, you should spell out who will inherit the business’ shares and if the partner’s beneficiaries will have a say in the business in case of death or disability. An exclusivity clause is essential in highlighting if the beneficiary can act on behalf of the other partners.
Most partners find it difficult to talk about this clause. However, it is crucial that you talk about what happens when a partner becomes disabled or dies and cannot contribute to the business anymore. The information should be documented in your partnership agreement to assist you to come up with individual estate plans that consider your business holdings. Unfortunately, some partnerships still overlook this clause without realizing how essential it is in the continuing operations of the business.
Salaries or distributions
One of the primary causes of disputes among partners is money issues. To avoid such problems, you should outline the partners who will get profits and the profit percentages. You also need to indicate the partners who will bear losses. You need to decide how to share profits and losses in the business before starting the partnership. One of the common ways of sharing losses and profits is by basing on the ownership percentage of the partners.
Besides, you should also state whether a partner can withdraw from the allocated profits annually or whether he or she can remove the entire allocated profits. Such terms depend on the financial needs of the partners. All partners should be in agreement about money matters and allocation among the partners. Also, don’t forget to outline when profits and losses are shared among partners.
No one wants to get into a partnership that will eventually fail, leading to dissolution. Dissolution matters are sensitive; therefore, don’t overlook them because you agree right now. However, it is vital that you talk about dissolution matters at the beginning of the partnership because at that point all partners are getting along well. Sometimes a partner might want to quit, or stop being involved in the operations of the business. The partnership agreement should state what should be done in such cases. The best time to figure out exit strategies is when you are starting out since working to make the partnership work and the business to take shape.
Partnerships have unique challenges. However, with proper planning, you can overcome the obstacles. You need to ensure that the inclusive clause is explicit and that you consult a lawyer when documenting the agreement. Notably, an attorney will help you figure out any issue that may arise as you draft the partnership agreement or offer legal advice.