Doing a business alone can be monotonous and lead to constrained growth. To bring a new, exciting dimension to the organisation, startup owners and entrepreneurs eagerly search for a co-founder who can partner in the overall growth. However, it is easier said than done.
Alike a romantic love relationship, a business partnership also begins on a good note. However, as time passes, ups and downs sneak in which leads to conflicts and misunderstandings, sometimes even ugly fights.
Overthinking about the future isn't beneficial, but it is recommended that partners should safeguard their interests by mentioning a few necessary points in the partnership deed upfront.
Although the partnership deed can be oral, it is advisable it should be written and signed by the partners to avoid any conflicts in the future. Here are a few essential clauses, which the partnership deed should explicitly talk about:
1. Percentage of ownership
How much ownership will each partner enjoy? It is an important question to be answered to avoid any clashes during crucial decision making.
Most of the time, ownership ratio is divided equally; however, sometimes a partner contributing higher capital or spending more working hours can ask for higher ownership from the other partners.
2. Profit and Loss ratios
"Money is the root cause of all evils" – so the partners should decide and mention the profit and loss distribution ratio in the deed. Even if it is same as the ownership ratio, it’s better to mention it explicitly in the agreement.
A point about the agreeable limit of drawings funds for personal use can avoid chances of a possible cash crunch.
3. Responsibilities and Compensation
A partner fulfilling additional obligations like accounts management, marketing, or sales may ask for additional compensation in the form of salary, bonus, or commission. In such a case, his duties and amount of remuneration should be specified in the agreement.
4. Mode of dispute settlement
Partners disagree on certain points. However, those disagreements can easily convert into conflicts or dreadful lawsuits before they realise. Mode of dispute settlement can help here. Partners, if feel necessary, can also mention the interference of an arbitrator to mediate between the partners and save time and money in filing lawsuits.
5. Consequences of termination or retirement
Mode of termination, impact on the dissolution of the firm, etc. and other relevant points need to be answered in the agreement.
Will another partner buy a retiring partner’s share? What will happen if a partner dies or goes bankrupt? These points in the agreement can avoid any clashes among the partners or even their legal heirs too.
Key Takeaway
The clauses should be discussed in advance, agreed upon, and mentioned clearly in the partnership agreement. An incomplete or unclear agreement is as good as having no agreement in the place, which can have awful consequences.
CAclubindia
