Partnership Agreements can be extremely beneficial to managing your business. By creating a partnership agreement, you and your partners will set the terms of your relationship to mainly avoid future conflicts. This article will cover how to draft a robust partnership agreement that will protect your objectives.
Partnership agreements are documents that outline the terms of a business partnership, including the rights and responsibilities of each partner. It can be either written or oral, but it is always best to have a written agreement because it will protect you in case of disputes or legal problems down the line.
Key issues to consider in drafting a partnership agreement
Outline the partnership’s parties and purpose.
It should include basic information about the business, such as its name and purpose and how all business transactions are conducted. Put in mind that this purpose differs from the general purpose of the partnership agreement, which is to create a legally binding relationship between two or more parties who want to manage and operate a business together in order to make a profit.
Decide on the financial contributions to the partnership.
A partnership is considered by default as a general partnership if it has two or more general partners who share equal rights in managing and operating the business, but practically, each partner contributes to the partnership in a different way. For example, if you’re a graphic designer, you might contribute your graphic design skills to the partnership. If you’re an accountant, you might contribute your full-time anticipation and accounting skills. Therefore, the financial contribution of each partner may be stated as cash, property or services, or any combination of these.
For example, one partner may contribute $50,000, and another may contribute his patent rights to the partnership that is valued more or less to the other contribution.
Determine how profits and losses will be shared among partners.
In most partnerships, each partner receives a share of the profits(ratio) based on their percentage of ownership in the business. For example, if you own 51 per cent of a partnership, you would receive 51 per cent of the profits. Other partnerships, however, may want to contribute in an uneven way. For example, if two partners have contributed $300,000 each, they might decide John will get 60 per cent of the profits, and Tom will get 40 per cent. If the business makes $1 million in a year, John will get $600,000, and Tom will get $400,000.
Also, you should consider the distribution of the profits and whether it will be monthly, quarterly or yearly distributions. Some partnerships agree to retain the profits until there’s enough money to pay out a lump sum.
Plans for financing and loans
A partnership agreement will usually plan for bond financing, loans from banks, or both. If the partners plan for the partnership to borrow money, it is essential to specify the maximum amount of money that can be borrowed by any partner without the permission of the other partners. The partnership agreement should also specify how the borrowed money should be repaid and the interest mechanism following the loan granted.
Determine ownership of intellectual property.
Intellectual property (IP) is a broad term that covers many different types of property rights that arise from intangible assets, including the following:
Copyright. This protects writings, musical performances and other works of authorship in both tangible and intangible forms.
Patent. A patent gives its owner the right to exclude others from making, using or selling an invention.
Trademark. This protects words, symbols and designs used to identify a company’s products and services.
Trade secrets. These are elements of business operations that give it a competitive advantage when kept secrets, such as customer lists, product formulas or manufacturing methods.
The parties specify how IP ownership will be determined in each of the following cases:
Prior to creation (pre-partnership);
In the course of partnership duties (during-partnership);
After starting the partnership (post-partnership); and
After the termination of such a partnership.
Confidentiality and non-compete clauses
The agreement should consider the partnership’s interests by including confidentiality and non-compete clauses. This will ensure that partners cannot use the partnership’s confidential information or compete against the partnership during or after the partnership.
Create a plan for partnership death or retirement or what happens if a partner wants to leave the partnership.
When you’re starting a partnership, it is important to take the time to think through what will happen if the partnership ends, whether that’s due to death, retirement or dissolution. If you don’t cover these possibilities in your partnership agreement, you could find yourself in an unpleasant situation when the time comes. It can be an uncomfortable conversation, but it is important for all partners to understand the rules regarding what happens if one or more of them leave the business or if they die or retire.
Make a plan for adding new partners or withdrawing old ones.
A partnership is a very flexible business structure. There’s no limit to the number of partners that can participate, and they can all be equally involved or have different levels of involvement. When you start a partnership, you’ll need to make a plan in your partnership agreement for adding new partners or withdrawing old ones. You’ll also need a plan for handling disagreements between partners, as well as what will happen to the business if it goes out or went for bankrupt.
Create provisions for resolving disputes.
The parties should make sure to draft an early resolution process to use to resolve minor disputes before they become big problems. Partners can meet with each other and try to resolve the issues amicably. This is an effective way to reduce conflict and costs if the partners are willing to engage in good-faith discussions and listen with an open mind.
Then, a mediation or arbitration clause should be added to the partnership agreement. These clauses do not preclude either side from filing a lawsuit, but they may limit the types of disputes that can be resolved through court action. Mediation and arbitration are often successful in resolving disputes before they become major problems.
It all comes down to ensuring that the terms of the agreement are appropriate for your own objectives. However, hiring an expert is the best way to ensure you have a comprehensive partnership agreement that efficiently addresses key issues in a way that is also legally sound. Our team of legal professionals can work with you to create a partnership agreement tailored to suit your exact needs and requirements, so you can focus on running and growing your business, secure in mind that the planning and protection of your business relationship with your partner are firmly in place.
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