Which key terms should be included in your partnership agreement

One of the most often asked question regarding business partnerships is, ‘which key terms should be addressed by the deed of partnership?’ A short answer is that a partnership agreement should be a holistic and thorough agreement that covers all issues of importance.

Address all main issues of a business partnership

These main issues include the percentage of ownership, profit and loss sharing, partners’ authority and voting, management, partnership property, and the term of the partnership and termination.

You should be aware that there are many other issues a partnership agreement should address, such as:

• Business of the partnership

• Loans to partnership

• Banking arrangements

• Holidays

• Absence

• Insurance

• Good faith

• Partnership policies

• Restriction on partners

• Intellectual property

However, for brevity, we shall be focusing on the above mentioned most common issues.

While there is no legal requirement of having any sort of partnership agreement in place, it will be highly beneficial for you to have one which is as detailed as possible.

Why your written business partnership agreement needs to be thorough, long, and detailed

Due to modern business practices, having informal partnership arrangements today can be highly problematic and troublesome. The same is true if your partnership agreement is not as detailed as it should be.

Default rules of the Partnership Act, 1890

If there is no partnership agreement in place that spells out the rights and responsibilities of the partners, default rules set out in the Partnership Act, 1890 will dictate major affairs of the partnership. These rules will also come into effect if the written agreement is silent on a matter in contention. 

The Partnership Act is not only severally outdated, but its’ guidance can also prove to be disastrous and lead to archaic situations.

For instance, these default rules assume that all partners will have invested an equal amount and resources in the business and, therefore, that the partners equally own the partnership business.

Consequently, you not only need a written agreement to make sure that the default rules do not apply, the agreement to be thorough and detailed so that no issue of importance is left unaddressed.

Important provisions to include in your partnership agreement

Every partnership agreement is based on the relevant and unique business objectives that the partners have. Furthermore, there are several types of partnership arrangements/agreement.

However, certain terms and provisions should be included in every partnership, regardless of the business objectives and the type of partnership arrangement, to minimise future disputes and legal issues associated with running the business and partnership matters.

This article will take you through the boilerplate clauses that you will need in your partnership agreement. 

You may also have entered into a partnership agreement that does not include the following terms. In such case, you may want to update your agreement and make sure it covers the following issue:

Percentage of ownership

In any partnership business, each partner contributes to the business that is likely to be in the form of cash contribution that will cover the start-up costs, cost of equipment, and so on. Further, some partners may pledge their services or property to the partnership business. 

Consequently, the percentage of ownership of each partner and profit and loss sharing usually depends on these contributions.

Therefore, a partnership shares/percentage of ownership clause is an important term to have in your partnership agreement. Otherwise, by way of the default rules of the Partnership Act, it will be assumed that business is owned by all partners equally.

Management of the business

For this provision, you do not have to list down each partner’s duty related to every aspect of the business. You only have to address the roles and responsibilities that will be assigned to each partner. Some partners will be responsible for accounting, or human resources, or payroll. It is worth having the roles appointed to each partner written in your partnership agreement.

Partnership property

It is not uncommon for the business premises to be owned by a partner in their own name. The business premises do not have to be partnership property. This property may be rented to the partnership. However, the partners should avoid taking rent without a proper lease in place.

Furthermore, it is highly important to specify in the partnership agreement which assets are specifically excluded from the assets of the partnership. Arrangements might also be needed to substantiate the partnership’s right to occupy these premises in such a case. This is needed to protect the partnership’s position against the owner partner and also so that the owner does not end up being saddled with a statutory tenancy.

Authority and voting

Each partner will have a vested interest in making the business a success. However, you and your partners might disagree on certain business decisions. Therefore, it is pertinent to have a defined procedure that regulates how important decisions concerning the business will be made. Such as changing place of business, sale, merger transfer or disposal of a part or all of the partnership business, requiring partners to introduce more money, expelling a partner, and amending the partnership agreement.

Some decision may require a unanimous vote of all the partners; others may require a majority vote or not require the consent of all the partners.

Lastly, this procedure must be fair. If the rules are too loose, some partner may be able to take unfair advantage and relationships will begin to crumble. Conversely, if the procedure is too restrictive, it will not stick in the long run.

Resolving disputes without court intervention

Most conflicts in business partnerships arise when disputes happen with decision making and due to disputes between the partners. Therefore, it is pertinent that the partnership agreement addresses how disputes amongst the partners will be resolved, preferably without the intervention of courts.

Allocation of profit and loss

All partners want to make a profit from their partnership business. As stated earlier, profit and loss sharing usually depends on the shares of each partner.

However, it is also possible for this division to be allocated equally to all partners regardless of ownership shares.

Therefore, the partnership agreement should clearly stipulate the method of distribution of profits to the partners. You may also want to set a lower limit on the amount of profit the business needs to earn for the profits to be distributed.

Termination of partnership and expelling a partner

If the partnership agreement does not state the term of the partnership, its termination can be triggered by the death of a partner or by one partner by simply giving reasonable notice to the other partners.

Additionally, in the absence of a partnership agreement or if the agreement does not cover the issue adequately, you cannot expel a partner either. This is regardless of how prejudicial their behaviour might be to you and the business. (The law differs when it comes to limited partnerships and limited liability partnership).

Further, if you do not have a partnership agreement in place or if your agreement does not include a detailed provision concerning the termination and post termination process, your withdrawing partner could also insist on selling off the partnership’s assets. 

Therefore, it would be best that the agreement includes a process for establishing the fair value of the partner’s share in case of withdrawal by the partner or death.

Last but not least, it should also include a provision that covers how a partner can be ejected or expelled from the partnership (in case of behaviour that is prejudicial to the other partners and the business).

Summary

The above-referred provision will help you see the value of having a detailed written partnership agreement.

Further, the above mentioned key terms are by no means exhaustive. A deed of partnership should cover and regulate a lot of other areas of key importance.

However, the terms mentioned above are a good place to start when forming an agreement with your business partners.

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