6 Key Clauses in the Partnership Agreement to make your small business huge.
Depending on the size of the business activities and the number of partners engaged, partnerships can be complex. The formulation of a partnership agreement is essential in this kind of business structure to lessen the possibility of conflicts among partners.
Although each partnership agreement differs based on business objectives, an effectively drawn partnership agreement can be difference between oblivion or prosperity for your business.
The following are must have clauses to include in your partnership agreement:
- The Proportion of ownership.
Partners ought to pledge what they will each give to the business in the partnership agreement. The partnership agreement may include pledges of services or property, and the partners may agree to provide capital to the business in the form of monetary contributions to aid with initial costs or contributions of equipment. These contributions typically determine each partner’s ownership stake in the company, and as such, they are crucial aspects of the partnership agreement.
- Profit and Loss Sharing.
Partners may decide to divide earnings and losses according to their respective ownership stakes, or this division may be distributed equally among all partners. In order to prevent disputes during the course of the business, it is essential that these terms are spelled out in the partnership agreement in plain detail. Additionally, the partnership agreement should specify when profits can be taken out of the company.
- Partnership Duration.
Although it is typical for partnerships to operate for an indefinite period of time, there are some cases where a business is intended to dissolve or end after attaining a particular milestone or after a set number of years. Even when the time limit is not defined, this information should be included in a partnership agreement.
- Decision Making and Resolving Disputes
The most common conflicts in a partnership arise due to challenges with decision making and disputes between partners. A voting system or another mechanism to ensure checks and balances among partners may be included in the parameters spelled out in the partnership agreement regarding the decision-making process. A partnership agreement should also specify how decisions will be made and how disagreements will be resolved. This is often accomplished through a mediation provision in the contract designed to offer a way to settle disputes between partners without the need for court involvement.
- Entry and Exit of Partners.
The partnership agreement ought to stipulate the procedure to be followed by partners who either wish to enter or exit from the business. The clause on Capital contributions would inform the minimum amount of capital to be deposited by a new partner as well as the procedure to be followed in buying out a partner from their partnership shareholding.
- Non-compete clause.
When a partner departs, you don’t want them to start a competitor nearby. The best course of action is to solve the issue before it arises.
Partnership contracts ought to have a non-compete clause stating that the partners won’t launch a rival company or engage in direct rivalry.
While a partnership agreements can have a myriad of clauses that are tailor made for the particular objectives of the business in congruence with the relevant legislation the above clauses are paramount to ensure growth of your business.
How can Netsheria help?
We, at Netsheria, have excellent and experienced corporate and commercial lawyers who will help you in setting up your preferred business vehicle by for example drafting and/or reviewing your Partnership agreement to ensure that you have the appropriate vehicle for your business needs. Contact any of our team today or book an online consultation here www.netsheria.com