A Brief Introduction About the General Partnership Agreement?
A general partnership agreement is an agreement that is created when two or more persons decide to enter into a business together. Each partner under a general partnership enjoys the same rights and duties as the other partner/s. It is a misconception that a general partnership agreement must always be in writing to be considered legal.
The agreement may be an oral one as well; however, it is always recommended that the partners should enter into a simple general partnership agreement when the partnership is created so that there is clarity about the terms that have been agreed to by the parties.
Even if the partnership is between family members or friends, this agreement should be entered into to ensure there is transparency regarding the various facets of the partnership. The agreement will serve as evidence of the rights and responsibilities of the partners and various other details that are important to the partnership. It will dictate the various aspects as to how the partnership shall be run and how all management decisions shall be taken.
Who Take the General Partnership Agreement – People Involved
A general partnership agreement is entered into between the parties who are creating the partnership. Every partner under the partnership arrangement has to sign the agreement.
Purpose of the General Partnership Agreement – Why Do You Need It?
The purpose of a general partnership agreement is to lay down in writing the terms under which the partners have decided to create the partnership. The agreement provides a framework for the efficient functioning of the partnership. It covers how the partners shall carry out the business. Once the partners agree on their roles and their ownership interest along with other important details, it must be documented in a written agreement to avoid any dispute between the partners in the future.
It can be challenging to prove the terms of an oral agreement, and hence, it is always better to have a written agreement in place. It is easier to enforce a written agreement in case of any dispute.
If such an agreement is in place, it will ensure that the business of the partnership will be carried on efficiently and all eventualities will be provided for. For example, in case there is no written agreement, the death of a partner will result in the partnership being dissolved. To prevent an outcome like this, an agreement that covers all such contingencies should be drafted.
Contents of the General Partnership Agreement
A general partnership agreement must include the names of the partners involved, the date from which the agreement shall be effective, and the territory in which it shall operate.
The agreement must contain the name of the partnership, the purpose for which it has been created, and the address of the business. The agreement must also provide the amount that has been given by each partner as the capital contribution. A crucial clause must be included in how the profits and losses of the business will be dealt with.
The agreement can specify how the benefits will be split among the partners or that the profits will be reinvested into the business. The method through which the partnership shall be run and how the partners shall take all the critical decisions must be mentioned. In case there is an even number of partners, there must be a method provided for how a tie between the partners regarding a particular decision will be dealt with. Whether the partners will receive a salary or not must also be laid down in the agreement.
The agreement must also contain a provision that talks about how the partnership interest of the partners may be sold in the event one of the partners wish to quit the partnership. The agreement must cover all the eventualities, such as what will happen if one of the partners retires or dies. There must be a clause stating the mode through which a new partner can join the partnership and how an existing partner can be removed or bought out by the other partners. There also must be a termination clause describing how the partnership can be dissolved or terminated.
How to Draft the General Partnership Agreement
The following are the steps to follow while drafting a general partnership agreement:
- The partners must negotiate and decide the various important details such as the amount of capital that each partner will provide, how the partnership will be run, which partner/s will hold the management position etc.
- All these decided terms must be laid down in the agreement to ensure that there is clarity among the partners about the various aspects of the partnership. This helps to ensure that there is a consensus between the partners about the running of the business.
- The purpose for which the partnership is being created must be mentioned.
- Once the agreement has been drafted, it must be reviewed thoroughly by the partners to make sure that their rights and interests have been adequately covered.
- All the partners must sign the agreement. This will ensure that the agreement is binding in nature.
- Under a general partnership, each partner will have the same rights and duties. Hence the scope for negotiation in these aspects is reduced.
- In the negotiations, the partners must ensure that their roles in the partnership and ownership interest are clearly defined to ensure the smooth functioning of the business.
Benefits and Drawbacks of the General Partnership Agreement
The following are the benefits and drawbacks of having a general partnership agreement:
- One of the major benefits of having this agreement is that it will serve as proof of the terms and conditions agreed to by the parties. In case of any dispute or confusion, it is easy to enforce a written agreement.
- Without this agreement in place, it can be challenging to prove the essential details such as the capital contributed by each partner, the method for distribution of profits, and other vital terms.
- A benefit of a general partnership is that it is effortless to form, and there are very few formalities that have to be carried out.
- One of the drawbacks of a general partnership is that each partner is liable for the acts of the other partners. There are joint and several liabilities. Hence the losses of the partnership will be considered as losses of the partners. There is no limit on the personal liability of the partners. This makes the general partnership an unattractive option for any potential investor.
What Happens in Case of Violation?
There can be various remedies available when one of the partners breaches the terms of the agreement. The general partnership agreement must enumerate the various acts that will amount to a breach and the remedies available to the other partners. These remedies may include expulsion of the partner for committing the breach or suing an individual for damages in case he/she has misappropriated the property of the partnership.
The other partners can buy out the interest of the expelled partner. In case the agreement does not provide for expulsion, it may result in the partnership being dissolved. Hence the agreement must state that the other partners shall have the right to expel a partner for a serious breach and carry on the partnership among themselves.
If there is any dispute between the partners regarding the interpretation of the terms of the agreement, the general partnership agreement must talk about the method through which any such dispute between the partners will be resolved. Usually, parties opt for a mandatory arbitration clause(1) as it a cheap and easy method to resolve any dispute. The dispute is handled by arbitrators that are selected by the parties, and this ensures that an amicable solution is reached.
In conclusion, a general partnership agreement can be helpful when certain persons wish to enter into a partnership. This agreement should be created even if such a business is entered into between family members or friends. This helps to ensure that the partners are on the same page as to how the business shall be run, and hence, it reduces the scope for any disputes. The agreement provides an outline for the working of the partnership.