So, you are looking to start a business with a partner and have opted to open a Partnership? Whether you choose a Partnership or a Limited Liability Partnership, here are 6 clauses that every Partnership Agreement should have.
- Contributions of Partners – It must be clearly stated what each partners bring into the partnership. The most common contribution is cash contributions but it could also be assets belonging to the individual partners that they wish to bring into the business. There are also contributions such as market access, network and certain skills that the partner have.
- Duties of Partners – Spell out clearly the role and duties of each partner in the business. It is best to avoid stating that the partners share the work equally as this would cause disputes in the future. Specify each partner’s level of authority, business decision-making power, key decisions that require all the partners consent and other responsibilities.
- Profit and Loss – Most businesses will discuss this clause 1st but often discuss the profit but not the losses. Other areas that should be discussed is how much salary they get from the business.
- Liabilities – in a Partnership, liabilities are shared between the partners (even when the other partner(s) are not aware of the liability). Partners should indemnify each other from decisions made without the other partner(s) being aware. Further, the financial exposure and liability in a Partnership is unlimited (Limited Liability Partnerships are limited). This means that any debts that the partnership cannot pay, the law will “chase” the partners personal assets to pay off any debts and liabilities.
- Dispute Resolution – No business is safe from disputes. Discuss and agree on a dispute resolution mechanism which could be mutual discussions, mediation and other out of court methods before the partners bring the matter to Court.
- Exit from the Business – While no one goes into a business thinking that the partners will separate, the reality is, partnerships separate all the time for various reasons. Avoid hostile exit discussions by agreeing before hand how partners can separate and what the partners take home from the separation.
These 6 are just a few of several key clauses that are required in a Partnership Agreement. Do understand that every business and partnership arrangements are different and are never exactly the same. A Partnership Agreement for 1 business maybe different from another Partnership Agreement.
Best to seek an experienced Commercial Lawyer to help evaluate your business risks and protect them with a Partnership Agreement.