You've had this brilliant business concept with your friend for a very long time. Every time you talk about it over a drink, you've been spitballing it back and forth, growing more enthusiastic and creating grinder plans. Now is the perfect moment to stop daydreaming and establish your amazing idea as a legitimate business. But where do you even begin?
While creating a logo and choosing stylish office furnishings are exciting aspects of starting a new business, creating an original partnership deed is a crucial first step that must be completed. I understand well that handling legal documentation is as enjoyable as getting a root canal. However, it is imperative that you have this formal document in place from the start in order to safeguard your business, yourself, and any partners you may have in the future.
This article will go over the top 7 reasons why, before you do anything official, your business must have a thorough, original written partnership agreement. Now let's get started!
It Cements Your Profit and Loss Sharing Agreement in Writing
Determining the proportionate distribution of earnings and losses among the partners is one of the most crucial parts of an original partnership deed. Each person's financial rights and ownership share in the company are determined by these ratios.
While you and your partner(s) may have a general verbal understanding of this split right now, getting the specifics formally documented is critical. A surprising number of partnerships end up in dispute due to messiness or miscommunication around these figures as the business grows and evolves.
Clear profit/loss share percentages incorporated into a legally-binding agreement help to avoid confusion or dispute when it comes time to distribute the windfall gains that you've all worked so hard to accumulate. In addition to keeping each partner accountable for their individual degrees of responsibility, it safeguards their equitable stake in the partnership. There's no need to argue over the finances any longer—everything is clear and concise!
It Outlines Each Partner's Defined Roles, Rights and Responsibilities
Apart from the financial aspects, defining the individual responsibilities of each partner in the business is another essential purpose of the original partnership deed. Rather than treating all parties as equal "co-owners," the agreement ought to specify exactly who will be in charge of each operational facet of the company.
Perhaps one of the partners will take on the functional role of CEO, managing high-level strategy and leadership. Another might be the expert in marketing who manages all aspects of advertising and promotion. Moreover, a third partner might be more qualified to oversee areas like accounting and human resources.
It is essential to define these roles, responsibilities, and decision-making authority in order to prevent misunderstandings and power clashes later on. It protects each person's legal rights and power within their own areas while holding them accountable for their actions. By clearly defining responsibilities, you reduce internal conflict and maintain team cohesion around individual strengths.
It Establishes Processes for Voting and Resolving Disputes
There will inevitably be situations where the partners disagree on a strategic direction or operational choice for the business, even though roles and financial shares were clearly outlined in the original partnership agreement. Because you're managing a business together, disagreements are sometimes unavoidable!
The original partnership deed must therefore specify how votes will be cast and how ties will be severed in the event of disagreement. Is it going to be an easy one partner, one vote setup? Or will there be a weighting of voting power according to financial shares or other variables? The most popular strategy is to match voting rights to profit/loss ratios so that the partner with the larger stake has greater sway.
Incorporating these specific dispute resolution procedures into the formal agreement guarantees the existence of an equitable and mutually agreed-upon mechanism for resolving deadlocks. By putting in place the right procedural safeguards to maintain the effectiveness and productivity of decision-making, it avoids protracted, pointless debates.
It Establishes Exit Clauses for Partners to Leave the Business
Regretfully, even for partners with the greatest of intentions, circumstances can eventually emerge where one or more owners must leave the business. Divergent worldviews, marital problems, health problems, retirement, or a host of other factors could be to blame.
Importantly, the original partnership deed takes these possible scenarios into account and specifies suitable leave protocols and severance clauses to safeguard the interests of departing partners as well as the surviving company. The agreement ought to outline procedures such as:
- Buyout provisions allowing partners to sell back their shares/ownership stake
- Clear calculations for determining their equity's value based on finances and assets
- Transition timetables for transferring responsibilities
- Optionally, non-compete and non-solicitation terms to prevent the partner competing against the business after leaving
These provisions safeguard the interests of all parties and provide a clear path for a peaceful divorce. They take out a lot of the difficult guesswork associated with transfer logistics and valuation in the event that an owner must eventually leave the company either freely or involuntarily.
It Formally Admits Each Partner Into the Business
An original partnership deed serves as the official charter for newly created businesses that were established as legal partnerships, validating the company's existence and each member's position within it. You won't be considered legally recognized business partners until you've signed this formal contract.
Each partner is specifically identified in certain sections of the deed as a primary owner and co-founder of the business upon signing. It attests to their joint intention and legal authority to conduct business together as a partnership. These broad statements of the partnership itself are supported and formalized by the specifics including financial sharing, roles, dispute resolution, and exit plan.
Executing an original partnership agreement is therefore not only prudent from an administrative and regulatory standpoint, but also essentially requires documentation for confirming the whole legal existence and organization of your company. Establishing it ticks important boxes with tax authorities, business licensing organizations, and other regulatory bodies.
It Protects Your Business From Personal Liabilities
You can't just assume your personal assets are automatically safeguarded, even though it's often advocated for small firms to incorporate as a formal legal partnership in order to restrict personal financial risks. This liability shielding may be breached by a poor or nonexistent partnership agreement, which might put your personal assets, cars, and residences at danger.
Maintaining the legal distinction between your personal and corporate identities is bolstered by a strong, well-written original partnership deed. It lays out in detail the responsibilities, stakeholder levels, and assets that belong to the business rather than the individual partners. This makes it far more difficult for creditors and the legal system to cut through the business shell and seize your personal belongings in cases of lawsuits or bankruptcy.
Additionally, indemnification clauses protecting each partner from personal liability resulting from the debts, commitments, and activities of the firm should be included in the agreement. Robust wording pertaining to liability protection considerably reduces each partner's exposure and legal uncertainty, even though it's not a foolproof safeguard.
It Signals Legitimacy and Attracts Investors
One of the first documents that potential investors or lenders may request to view if you're seeking outside funding for your company's expansion is your original partnership agreement (or incorporation documents, if your business is formed differently).
A thorough, professionally-written partnership deed is a crucial indicator to astute lenders and investors that the business is well-run, reputable, and worthy of their capital. When one is absent, there are instant warning signs and doubts about the founding team's sincerity.
On the other hand, it indicates that the partners have carefully thought through almost every possibility when they are able to provide a comprehensive agreement that outlines the ownership structure, roles, money, and procedural standards. Investors find the company far more enticing and "de-risked" as a result of its shown administrative maturity and commitment.
In addition, the deed's clearly defined partner responsibilities and exit clauses reassure that there are safeguards in place to maintain business continuity in the event that an owner needs to be changed in the future. Investors do not want a pivotal participant to be free to abandon the company without any direction or purpose.
The Bottom Line on Original Partnership Agreements
Thus, as I hope I've persuaded you, creating a solid original partnership deed at the outset of every enterprise with several owners is vital. It is essentially the fundamental legal framework that formally creates and regulates the arrangement of your joint venture and co-ownership.
Even though it takes some time and money up front, having this written agreement in place from the beginning reaps countless benefits by preventing issues before they even emerge. It reduces the possibility of future disputes and liabilities by outlining each party's precise rights, obligations, and safety precautions. Most importantly, it establishes your partnership as an official, respectable company that deserves funding and support from stakeholders, lenders, and clients.
An original partnership agreement is a must if you're serious about creating a properly managed, long-lasting business that is designed for development and success over the long term. Before anything else, have an accomplished attorney draft yours!
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