Are you interesting in forming a partnership business with your friend? It’s a great idea since a partnership business will share profits and losses, decrease burden and stresses between partners. But you need to make sure that you prepare a proper partnership agreement. In this complicated society, one must not trust anyone beside family members. When a contract is made into black and white, both parties will feel more secure and build trust between each partner thus create a healthy partnership.
It doesn’t matter how long you have known your friend, you must always form an agreement between both parties. It is important because it will detail what each partner can get in return, what to expect from each side, how profit and loss will be divided, etc… The partnership agreement will provide you and your partner a firm understanding about the business relationships, the rights, responsibilities, rules, regulations and other business matters to avoid unnecessary conflicts. We will now go into detail about the partnership agreement.
What Exactly is a Partnership Agreement?
A partnership agreement is a written contract between two or more people who would like to enter a join business to earn profits. Generally, a partnership contract will include the nature of business, rights and responsibilities of each partners and their capital contribution. Partnership businesses can usually be form without a contract, but it is always better to be well prepared. In fact, a partnership business only becomes a valid partnership business with this agreement.
Why Should You Form a Partnership Agreement?
A partnership contract helps you to understand and create a relationship with your partners. It also provides a profound understanding of the business relationships you will have with your partner in the future. Since both parties will be creating a contract, you can be able to write an agreement that is in mutual benefits with your partner.
Forming an agreement is critical for a business because it will determine the rules and principles between each party in the business. Formally, these rules are known as The Uniform Partnership Act, hence controlling your partnership business. Overall, these rules make it easier for each party to do their jobs, better planning and organizing.
What Does a Partnership Agreement Template Include?
A Partnership Agreement can be customized according to the nature of the business, but there are some standard guidelines need to be included in an agreement called The Uniform Partnership Act. The standard guidelines and regulations are applied to all parties in the business. These rules are also ‘one size fits all’.
The Name of the Partnership Business
One of the most important things in any agreement is the name of the business since it must be agreed within all parties. You can use a name based on your name, such as John & Garry. You can use last names or create a creative name that fit the nature of your business. But before registering your new business name, you must make sure that it is still available and haven’t been taken by others or else you will have to expect some lawsuits for copyrights.
Contributions of the Partners
This is also very important in the agreement since it will make clear how much contribution each party is putting in. You will need to make things clear beforehand by mentioning how much cash, services or properties you will be contribute in the business, and so do other partners. You also need to be clear about how many ownership percentage each partner will have, a conflict of interest between partners have bring many businesses into their downfall.
Sharing of Profits and Losses
In a Partnership Agreement, partners must decide how profits and losses will be distribute base on the partner’s percentage interest in the business. The profits and losses will be decided, either base on the end of the year or on monthly basis.
Decisions making among partners can be a hassle and will demand cooperation between each partner. Business partners often take a common vote for deciding over business decisions. This usually happens when there are big and important decisions need to be made. The minor decisions are made by individuals since they won’t affect the business in a serious manner. Therefore, you and your business partners need to decide which should be count as a serious matter and which can be handle independently.
Partners can decide to act on their own freewill or inform others about their action, this depends upon the decision written in the agreement. You must state clearly how you want you and your partners handle the business, either autonomously or dependently. While it is uncommon because partners normally want to inform others before making any important decisions but being cautious never hurts anyone.
Each person in the partnership agreement is responsible for their duties, but the list out every single detail in the contract may not be a good idea. Thus, to dictate important activities such as accounting, customer services, logistic, marketing, managing is critical in the agreement. You should be clear with other partners about their roles and responsibilities in the business.
New Partner’s Admission
When a business is expanding, you and your partners might find the need to bring in new support – new partners. To welcome new partners has its own appropriate procedure. All existing partners must agree over the procedure and approve the new partners.
Death or Withdrawal of Partner
It is also necessary to create rules for the withdrawal or death of the existing partner. The rules for handling the exiting 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 there are conflicts between partners, do you go straight to the court or solve the problems on your own? You need to mention how to handle conflicts in the agreement, so they can be resolved accordingly in the future.
Types of Partnership Agreements
Memorandum of Understanding
In this agreement, the partners are binding to work together in a collaborative way on the regional, national or global level to achieve the common goals. In this contract, partners will mention that they wish to share their resources with other partners.
Comprehensive Program Cooperation Agreement
This is a legal agreement between partners, required them to work together to attain a common goal through a defined strategy. In this contract, all parties will agree to share resources, responsibilities, risks and results, it also highlights the budget and the program’s plan.