A Partnership Agreement is a contract between the partners of a firm regarding the terms and conditions of the business that is going to be undertaken by the Partners. It also outlines the ownership of each partner and the plan of division of future profits and losses. A Partnership Agreement is important because it helps to avoid disagreement, confusion and misunderstanding in future prospects. There are clauses that must find place in a partnership agreement.
Ownership Control: It is important to list down how much is controlled by each partner in the business undertaken by them jointly. At the same time it becomes important to write down the various roles and responsibilities which are held by the Partners as per their ownership. Defining the scope of responsibility within the ambit of their position in the partnership firm should be decided before the operations start.
Distribution of profits and losses:This is an area which creates a lot of confusion and misunderstanding at a later stage. Profits can be divided either equally or in proportion to the share brought in by each partner and once that is decided, no room for discrepancy remains. They can also be distributed at the end of each financial year or on in consideration of other financial plans depending on the mutual understanding of partners.
Partner’s authority and decision making process of partnership: There could be a clause where any partner can take a decision for the firm binding all the partners to that decision as a result. This is when all the partners have equal ownership and management rights. In order to avoid misuse of power at the hands of one partner, this clause can be struck out in the partnership Agreement.
Power to add or remove partner:Making room for this clause has become a necessity with the fast changing business standards. As the business expands the need for expanding the management also arises. Similarly if a partner doesn’t function according to the standards set by all the partners together, procedure to lay off can be initiated.
Dispute Resolution:If there are disputes between the partners which do not get resolved by mutual understanding then they can either resort to arbitration or legal procedures. It is suggested to appoint an arbitrator because arbitration works in favor of the partnership firm as it helps to save a lot of time and effort of the partners leading to effective and efficient dispute resolution of the Partners.
A Partnership Agreement is important because it helps to spell out the roles and responsibilities of each partner, it also helps to avoid tax issues by deciding the taxing structure of the Partnership and most importantly, it helps to avoid the legal issues by deciding the liability of each partner bringing in the capital to form Partnership.