A Partnership Agreement is not about trusts; it is about managing expectations of the partners. Be it being partners with a family member, your best friend or a total stranger, the need for a written Partnership Agreement cannot be emphasized enough.
A Partnership Agreement need not be overly complicated (and expensive), especially if you are just starting the Partnership. Ideally, it is best to have it all discussed and agreed but having a basic agreement (not google template but one that is drafted by a lawyer) with room to amend later on should things change in the business, can also be done. Here we share 5 things you need to include in your Partnership Agreement:-
1. Name of Partners
This goes without saying that you need to know who your partners are but there have been situations where a proxy is used and the “real” partner is someone else. Potential problems that may happen is the “real” partner may make a decision that will cause losses to the partnership business when in fact, the “real” partner is not a partner under the partnership. Always be clear who is a partner in the business and avoid unnecessarily using proxies.
2. Type of Partnership Business
What type of business the partnership does is also important to be agreed before hand. There will come to a point where the type of business is not sustainable or struggling (just look at the businesses that closed during COVID). There may be a need to pivot to another business. The purpose of agreeing on the type of business is to allow any of the partners the right to exit on good terms if the new business is not something the partner wants to get involved in.
3. Roles & Responsibilities
Almost all partnership will start with the profit-sharing ratio but most overlook the roles and responsibilities that each partner has in the business. Avoid having shared responsibilities and have each partner have their own roles and responsibilities. With a clear roles and responsibilities, partners are accountable for what they are entrusted to do. Clear roles and responsibilities will also avoid disagreements between partners on who was suppose to do that role.
What does each partner bring into the partnership business? It can be monetary, network, distribution channels, network, technical skills, management and administrative etc. As long as each partner understands what they need to contribute to the business partnership and the partners agree, it should be in the Partnership Agreement. Potential problems could arise where a partner is required to contribute money later on in the business, when that was never agreed and that partner contributes something else.
Every business needs a clear exit. Not every business lasts forever. There are various reasons why partners want to exit the partnership business, which we will elaborate in another time. What is important is that there is a clear way for a partner to exit the business in good terms. Exiting the partnership business does not need to be ugly. Exit in good terms, which can only happen if the exit terms are clear and agreed beforehand in the Partnership Agreement.
Do feel free to drop us an email at email@example.com should you have any further questions regarding a Partnership Agreement.