A Partnership Agreement, also known as a Business Partnership Agreement or Partnership Contract, is a contract that spells out each partner’s rights and responsibilities, as well as profit and loss distribution in a business venture. When creating a partnership agreement, there are a number of important clauses that should be included and in this article, important clauses in a partnership agreement, we take a look at the process involved in more detail and the options available to you.
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What is the purpose of a Partnership Agreement?
A formal Partnership Agreement is essential because it lays out all of the rules, responsibilities, and financial information that apply to a company partnership and its general partners.
Furthermore, because the rules of the partnership have previously been agreed upon and signed by all of the partners, adopting a formal contract minimises the possibility of future disagreements arising between partners.
What important clauses should you include in a partnership agreement contract?
- Date of formation, place, name, and purpose of the partnership
- Each general partner’s contact information as well as their responsibilities are provided.
- Description of capital contributions made by partners
- Distribution of profits and losses (equal share or fixed per cent)
- Rules governing the admission of new partners, the withdrawal of existing partners, and the dissolution of a partnership are outlined below.
- Accounting procedures, as well as annual report specifics
- Is there a person in charge of the day-to-day operations of the company?
- It is important to understand when meetings will be held, the voting procedures, and the process by which decisions will be taken, including which choices require unanimous approval from all partners.
- Drawings – how partners should be paid
- These are clauses that say that the partnership will take responsibility for and protect its partners against any liabilities or claims that they incur while carrying out the business of the partnership.
- Rights to payment on termination of the partnership or if a partner left.
- Property clause distinguishing between property that belongs to the partnership and property that belongs to the partners.
- Restrictive covenants in the event that a partner leaves the partnership.
- Confidentiality clauses banning partners from discussing the partnership’s confidential information.
- Dispute resolution procedures.
- Dissolution of the partnership. If the partners want, the agreement should provide for the partnership to continue if the events that would normally dissolve a partnership happen, e.g. a partner dying or going bankrupt.
What happens if there is no partnership agreement?
If a Partnership Agreement is not in place, your relationship as business partners will be governed by the Partnership Act 1890. The Act regards all partners equally and, unless you agree otherwise in a Partnership Agreement, all partners would vote equally, share the business’s capital and profits, and be jointly liable for any obligations.
There is no one-size-fits-all approach to how a partnership should operate, and it may appear unjust if you each make separate capital contributions or if one partner enters into a costly contract on his or her own, leaving all other partners equally liable.
Without a Partnership Agreement, there is an increased likelihood of disputes and disagreements between partners. The agreement may include clauses that pre-empt issues and establish proper mechanisms for resolving them.
Additionally, it can create complications if one of the partners want to leave the business or dies, as this will instantly terminate the partnership.
Can a Partnership Agreement be amended?
It is critical to review your Partnership Agreement whenever a significant change or milestone is accomplished to ensure that it remains appropriate. Changes could include your capital contributions, the business’s assets, or the addition or departure of a partner.
A Partnership Agreement will include a procedure for amending it. Typically, every amendment to your company’s Partnership Agreement requires unanimous written consent from all partners.
Admission of new partners, withdrawal of existing partners, and dissolution of a partnership
Partners should agree in a Partnership Agreement on the future admission of more partners, including whether or not a vote would be required.
Leaving a partnership is a difficult decision. A general partnership partner may eventually decide to leave the partnership, either voluntarily or involuntarily, for a variety of reasons, including retirement, imprisonment, or incapacitation.
Similarly to how they would consider adding new partners, general partners should consider how to exit the partnership. This includes determining whether withdrawing partners must notify the other partners and whether the partnership would dissolve if one member leaves.
When forming a commercial partnership, general partners should include articles addressing dissolution (the termination of the partnership), specifically whether a vote is required to dissolve the partnership and how property and assets would be distributed in the case of dissolution.
How we can help
We have a proven track-record of dealing with partnership agreements. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
How to Contact Our Corporate Solicitors
It is important for you to be well informed about the issues and possible implications of a partnership agreement. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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