Understanding a Partnership Agreement
In starting a partnership with one or more parties to create a business or further a current business model, it is always important to get the details of the working relationship on paper. This will create an understanding amongst the concerned parties of what is required and expected from each legal entity, whether they be individuals or business units. The need for one of our many partnership agreements is based on all parties concerned realizing that their working together has become a long-term situation and needs clear definitions of the limits and expectations of the working relationship.
Creating an agreement between partners will become the standard terms of engagement when it comes to who delivers what into the new business relationship and will include the terms for resolving any disputes that might come up during the period of the agreement. The Partnership Agreement is how the parties will govern the entire relationship from start to finish. It will also appoint the relevant mediators and exit clauses if the partnership is dissolved. Of course, the agreement will define the share ratios of how the revenue and profit that is generated will be divided and where the operational costs will be allocated. The Partnership Agreement template will reduce every decision down to the simplest form to make the partnership work better and more profitable.
Purpose of a Partnership Agreement
The purpose of the agreement is to define the roles of two or more parties in business to make a profit from the business. The document will be drafted to include all the parties’ details and duties to make said profit and will outline the process of how the partnership will be managed and who will be responsible for the various steps in the business process. It is important to remember that the business partnership agreements become the reference guide for profit sharing and disputes and as such, should include all the details of the roles and responsibilities of the parties concerned.
Basic Details of Agreement
The first section of the agreement must include the legal details of all parties concerned with relevant contact details and signatory details.
- Partners Names - the full names of partners/business units or individuals
- Partners Address details - current legal addresses for partners/business units or individuals
- Partner Signatory - full names of the person responsible for each of the parties as a business unit
The signatory of each party to the agreement will also be taking personal liability for the business dealings, debt, and other obligations of the whole partnership. This clause protects all parties to the agreement in the event of fraud or absconding of any party from the partnership.
- Partnership Name - The legal name under which the partnership will be conducting business in the marketplace.
- Business Purpose of Partnership - What is the business that the partnership will be conducting, the market environment, and the expected result of the partnership?
- Time Terms - Is there a time limit to the partnership or will it conduct business indefinitely?
- Location of Partnership - It is important to list the legal address of the partnership and where the business will be conducted. This will reduce future conflicts around this issue.
The basic details of the partnership agreement template are vital for the smooth integration of the partnership and the various business units that are taking part. It will also structure the interaction between the parties for the future of the partnership and business dealings with suppliers and clients. These details will formulate the basic structure of the partnership and various responsibilities of all involved.
Operational and Business Intent
This section of the agreement will detail the focus of the partnership, the business intent of the venture. A partnership venture often has lower set up costs and operational expenses. However, when entering a partnership, it is still vital to document these details for the event of a dispute or disagreement. In these circumstances, the agreement will define the specific responsibilities of each party regarding the costs and expenses of the partnership business.
- Operational Capital - In many instances there is start-up capital needed to fund the partnership and the agreement will break down the capital needs of the partnership business and will detail the partner that is responsible for these costs. The agreement will also define if this capital will be in a one-off cash injection or be funded over a specific period of months until the partnership becomes self-funded.
- Capital Repayment - The agreement will also stipulate the repayment of these funds whether they be initial capital or working costs to the party concerned. This will have an impact on the profit ratios and business revenue generated by the partnership. Therefore, these details must be agreed upon by all parties concerned. The agreement will stipulate the terms of repayment and in the event of dissolution who is responsible for the repayment of the used capital and expenses.
- Share Percentage - A proper partnership agreement template will define the shareholding of each party. Although a partnership does not have the same legal requirements of a limited company, it still requires that each party has a clear understanding of the share percentage that they are responsible for. The share percentage of each partner will define the voting rights during partner meetings and for major business decisions.
- Business Purpose - Clear statements as to what the partnership intends to do, what business will be conducted, and how it will be conducted. This will highlight the processes needed like manufacturing, suppliers, and proposed client base that the product or service of the partnership will be marketed to.
It is generally understood that all parties concerned agree to make a profit from the business intended. However, in an unstable marketplace, it is critical to define the responsibilities of each party to make the internal processes of the partnership as smooth as possible so that as a whole, the partnership business can respond and react to the market fluctuations as best as possible.
Backend Operational Details
Every business needs proper accounting and internal structures, a partnership venture needs the same structures to ensure the successful management of the partnership business. These structures include:
- Business Accounting - Often partners in a business partnership might have an existing accounting resource but the accounting function for the partnership must be clearly defined. Accounting for any business is often seen as the most vital part of the business, as it will enable partners to understand where the funds flow from and where they flow to. This will become crucial if the partnership wants to look for funding or receive an offer for the purchase of the business model.
- Production and Manufacture - The agreement will create the framework of where and how the products of the partnership business will be produced. It will define the processes and possible timelines needed for the manufacture of products or the timelines needed for service delivery to the clients.
- Shipping and Distribution - The shipping and distribution of the business product or services to the client base of the partnership. Where parts and components will be sourced if required and how the shipping will be handled.
- Organizational Structure - This is a very important section for any business or partnership. In this section, the parties will clarify the chain of command and how business decisions will be made so that all concerned will understand the flow of decisions and authority. This will also help in times of necessity as this is when clear decisions are needed to ensure the sustainability of the business.
- Revenue and Profit Split - If each party still has a separate business to operate, this will clarify the way that the profits will be divided between the partners. If this is the sole business for the partners, then the profit divide details will make the accounting simpler as each party will know what revenue will come their way and how payments will be made. This clause will also define how the losses of the partnership will be handled; what percentage of the losses will be carried by each partner in the business.
- Day-to-Day Management - The partnership agreement template will also breakdown the day-to-day responsibilities of each person involved so that the running of the business is conducted smoothly and without issue. This will ensure the future success of the business and will define organic growth when the business flourishes and will assist in understanding the bottleneck when there are business constraint issues.
This is an often-overlooked section of any business agreement and in the case of partnership agreements, it is vital. Partnerships are designed often in a temporary circumstance and so the exit clauses are very important for the legal dissolution of the partnership. These clauses cover everything from the expected to the unexpected and will guide the parties in the event of minor and major disputes as well. Regardless of what partnership you are entering, the exit clauses are in many cases the most important part of any agreement as they will guide you to the amicable and “friendly” dissolution of the agreement.
- Term and Notice Periods - The agreement must stipulate the term of the agreement and the required notice periods for each party to leave the partnership. These clauses might even have penalties listed for early exits etc. The standard notice period for partnership agreements is 30 days and you can detail the specific terms and notices in your partnership agreement for all parties to sign off on.
- Natural and Unnatural Causes - In the event of natural events that restrict the business of the partnership like the death of a partner or untimely withdrawal of a partner, these clauses will guide the other partners on how to deal with the situation. It will also name the legal steps that might be taken and how to proceed during the circumstance.
The exit clauses are very important for any business as they will help define the process to make money as well as how to exit from the partnership for any party that feels that the partnership is not profitable anymore.
These are clauses that every agreement must have to ensure the legality of the agreement and they deal with events and circumstances that are outside of the control of the parties concerned and how to deal with them.
- Force Majeure - Classified as an act of God that prevents any of the parties to fulfill their part of the partnership business. It also excludes them from penalties in the event of force majeure.
- Arbitration - The agreement will appoint the process of arbitration in the event of the parties being unable to settle a dispute through normal channels.
- Exclusivity - This clause will restrict the partners of trading in the business sector of the partnership for the term of the agreement and sometimes for a period after the conclusion of the agreement in direct competition with the partnership business model. This provides security for all parties concerned.
- Contravention of Partnership Agreement Template - Defines the process of prosecution of any party that contravenes the stipulations of the agreement.
- Amendments - The process of how any amendments to the original agreement will be agreed to and added to the partnership agreement.
- Authorizations - Often called the signatory page, where all parties sign agreement to the partnership agreement and the totality of the agreement.
Partnership agreements solidify business partnerships and give each party their responsibilities and duties as well as their revenue and profit shares. If you are looking to get a new business venture off the ground and you have partners involved, sign up to Business-in-a-Box and download the Partnership Agreement today.