A Brief Introduction About the Business Partnership Agreement
When two or more people decide to do business together, their partnership requires a lot of paperwork as proof of the investments made by each of those individuals. Both parties sign a Business Partnership Agreement to specify such details in addition to their responsibilities and obligations. It becomes extremely crucial to make sure that both parties know what they are getting into.
Further, it is also important that both parties are protected by an agreement and a law. A Business Partnership Agreement is a legally binding agreement that requires a lot of work. Usually, when two people partners, they individually contribute assets, capital, real estate assets, etc.
The agreement is aimed to specify all such details in addition to interest percentage, ownership percentage, cost & profit share, etc. While drafting the agreement, it can be hard for both partners to think of terminating the partnership. However, it is paramount to anticipate any unforeseeable situation and specify the solution in the agreement. Loss is another such factor that should be anticipated by both parties before starting the partnership so that they can define a solution in the agreement.
Who Takes Business Partnership Agreement? – People Involved
Any two or more individuals or business entities can sign such an agreement to avoid any future conflicts and confusion. The agreement also ensures that there is a solid written proof for the partnership. As mentioned above, the agreement specifies all key features of their partnership.
Purpose of Business Partnership Agreement – Why Do You Need It?
Such an agreement is needed only to work as proof of the partnership between two or more entities. These entities can be established business entities, or they can be novice business enthusiasts. In the absence of a Partnership Agreement, there are huge chances of conflicts and confusion. There are also possibilities of forgetting or neglecting responsibilities and obligations, so the agreement works as a reminder for that.
Here is the purpose of this agreement –
- The agreement specifies the responsibilities and obligation of both parties
- It saves both parties from entering into a conflict, misunderstanding, and confusion
- The agreement gives a solution for any conflict
- It details out the assets brought by both parties into the partnership
- It specifies the details of partnership share and profit share
- It specifies how the cost and losses will be divided
- There won’t be an additional tax liability
- The agreement ensures that the default state laws for partnership are not applied
It is important to note that there are many downsides to not using a partnership agreement. In each state, there are different laws for partnerships. In the absence of a partnership agreement between partners, default state laws for partnership apply. This may cause harm and loss to both partners. Further, a partnership agreement also ensures there is no additional tax liability.
Contents of the Business Partnership Agreement – Inclusions
It is essential to draft a Partnership Agreement with caution and care. Both partners should devote enough time in researching and reading about the benefits of an agreement. They must understand each clause and condition of the agreement carefully. It is suggested that both parties take legal help before signing the agreement. Like most other agreements, the agreement must include necessary details of both partners such as name, phone number, personal address, etc. The agreement should also include these necessary details of the company. Such basic details include name, address, phone number, etc.
Further, the agreement must list out the investments made by all partners. Investment can be in cash, assets, or real estate. It should also add the details of the ownership percentage.
Voting rights and tax responsibilities are another two key inclusions in the agreement. A partnership can be both long term and short term. If there is a specific time for which you and your partner have decided to partner, you must mention those details in the agreement. In case of no such end date, you must add a termination policy in the agreement. The agreement must include the details of governing laws, as well. In the event of a conflict or dispute, governing laws help resolve the matters. It also tells the partners about the ultimate rule of the partnership.
Further, if the partnership includes any benefits such as insurance or health care, the agreement must specify those details. If the company decides to hire some professionals, then the agreement can specify the details of their roles and responsibilities. Such a professional can be lawyers, accountants, IT department, etc.
How to Draft the Business Partnership Agreement?
Before drafting an Agreement, it is required to note that there are three types of Business Partnership Agreements. These are a general partnership, limited partnership, and limited liability partnership. It is imperative to decide the kind of partnership you want to have with your partner. In general partnership, each partner has equal rights and responsibilities. They share losses and gains equally. In a limited partnership, the partners don’t have similar responsibilities and liability. It may have one silent partner who is only investing the money. In a limited liability partnership, partners can choose how much they want to invest and how much they want to be liable. It is a very formal kind of structure.
Once you decide the partnership you want to have with your partners, you should sit with them to draft responsibilities and rights. Before writing everything in the agreement, you must have in-person discussions with your partners. Once all involved parties are on the same page, an agreement can be drafted. After a draft of the agreement is ready, both parties should carefully read the agreement and then sign it is paramount for both parties to understand the tax liabilities, termination policy, and governing laws. Each party can individually take the help of an experienced attorney and have an individual lawyer.
When two or more to-be partners sit together for a discussion before signing the agreement, they must explore all the options to negotiate with each other. From the type of partnership, they want to get into individual liabilities and profit-sharing, all parties should discuss and negotiate. However, it must be noted that in a partnership relationship, if there is no scope of any negotiations, it shouldn’t be forced.
Benefits & Drawbacks of the Business Partnership Agreement
There are multiple benefits of using a Partnership Agreement. It ensures everything is on paper, and in the case of any breach, both parties can mediate after reading the terms and clauses of the agreement.
Here are a few point-wise advantages of this agreement –
- It ensures there are conflict and dispute management in place
- It ensures, governing laws are applied
- It ensures default state laws of a partnership are overruled
- It specifies all the details relating to the partnership
- It gives a clear idea of how the profit and loss will be shared
- It protects both parties
- It details out the responsibilities and obligations of both parties
- It deals with changes in a rightful manner
- It avoids tax issues
There are no disadvantages to a Partnership Agreement if both parties want to partner rightfully and don’t want to cheat on one another. The agreement ensures both parties do business together smoothly and swiftly. The agreement can be risky only for the party that wants to breach the agreement. A carefully drafted agreement is only beneficial in the long run.
What Happens in Case of Violation?
Both parties can mediate after referring to the agreement in case of any breach or violation. However, both parties are well within their rights to approach the court if mediation(1) and agreement clauses don’t settle the conflict. The governing law written in the agreement pays a huge role in solving the conflict. Both parties should fully understand state laws and governing laws. Courts also refer to the agreement in case the partners decide to approach the court.
A Business Partnership Agreement is a highly sophisticated piece of document that later becomes the basis of the partnership between two or more people. The agreement not only ensures a safe partnership but also spells out the responsibilities of both parties. At any given point, involved parties can refer to the agreement and solve any confusion or doubts.
The agreement should be drafted after consulting an experienced consultant or attorney. In the case of a long partnership, it is vital to have a consultant. While choosing a Business Partnership Agreement sample online, you must ensure that you trust a reliable source. We have taken the help of an experienced attorney in drafting the Business Partnership Agreement sample. You can download the PDF from here and customize it as per your need.