September 15, 2020
Managing a partnership firm isn’t a cake walk. Many factors must be considered before signing the final partnership agreement. Though business partnerships may have its own perks in terms of monetary and intellectual matters, it also has its own share of disadvantages, like possible disagreements, monetary adjustments, or ego clashes, leading to a fallout. As such, it is important to have an unambiguous partnership agreement with clear and comprehensive clauses. We have culled out some important aspects one must consider before sealing a partnership agreement to avoid disputes and impasse in the future.
- Be wise while choosing your partner/partners: The success of every partnership firm depends on the partners working towards a common goal. Disagreement between the partners may lead the firm to downfall. Hence, it is important to have a partner/partners who has a similar thought process as yours and looks at things with an aim to achieve the common goal. Networking is a great way to help you understand the other person’s work methods and values in this regard.
- Create a balanced Partnership Agreement: A well-drafted partnership agreement is a must for a partnership firm to work seamlessly. Here are a few key points to a balanced partnership agreement.
- Name of the partnership firm: Choose a unique and original name for your partnership firm. The name should not have resemblance to any existing business. There is also restriction on use of words like “empire”, “emperor” or “crown”. Use of such words in a business name requires prior government approval.
- Partners’ contribution and ownership: The partners’ contribution may be in different forms such as cash, assets, or services and based on that their subsequent valuation of percentage in ownership should be determined.
- Allocation of profit and loss: Details on how the allocation of profit and loss will take place should be clearly mentioned in the partnership deed.
- Partners’ authority in decision making: The role of the partners having the authority to take part in the decision making process should be clearly defined. This clause should specify who should have a final say in the decision making process or if any decision requires a majority vote or a unanimous consent.
- Allocation of management responsibilities: Splitting up of duties among the members along with individual responsibilities is the key to an ideal partnership deed.
- Admission of a new partner: The process of onboarding new partners should be properly documented.
- Exit of a partner: The withdrawal process of a partner should be clearly documented in the agreement. There may be withdrawal of a partner either by death or by choice.
- Dispute resolution methods: The deed should contain specifics about dispute resolution methods to be opted for possible difference of opinions that may arise in the future. The dispute resolution methods should necessarily contain Alternative Dispute Resolution (ADR) or court-order to handle disputes.
- Preference of LLP over general partnership: Before deciding on a registered partnership, you may want to go through the benefits of a Limited Liability Partnership (LLP). An LLP comes with many advantages as compared to that of a regular partnership firm. These benefits include-
- Limited liability of the partners
- Separate legal entity of firm from its partners
- The firms capacity to own assets in its own name
- Perpetual existence which is not affected by the death or exit of the partners
- Tax advantages
- Easy fund raising capacity, etc.
- Capital distribution Clause: The capital distribution clause in the partnership deed should include varied ways of capital distribution among the partners in the form of cash, tangible assets such as land, premises, machinery or inventory, and intangible assets such as personal network of contacts and goodwill etc. The clause should also specify the partners’ initial contribution to the firm and any changes that were made in the capital amount during the continuance of the firm (in the form of cash, tangible or intangible assets etc.).
- Plan a systematic exit strategy: The partnership agreement should specify a systematic exit plan for all the possible dissolution scenarios, which should include-
- Partnership dissolution procedure
- Every nook and corner of the distribution of profits, assets, and capital
- Strategy for dissolution of the firm
A good exit strategy will help you avoid chaos and deadlocks in the decision making process of the firm. One of the most viable strategies in this regard is taking a third party on board (specially in case of a 50/50 partnership) who will act like a tiebreaker in case of voting polls among the partners to avoid deadlocks.
A partnership registration is a great way to start with for any new organization. But, with the passage of time, and depending on the expansion of the business, one can always opt for conversion to other business structures such as LLP, Pvt. Ltd. Company, or a Public Ltd. Company, as per the size and requirement of the business.