When entering into a partnership with another person it is important to enter into an agreement, to discuss various issues. The most important one being the manner in which you will share profits and losses.
Generally, a partnership agreement helps you to think about and decide on the following:
1.NAME OF THE PARTNERSHIP
Most partners opt to use their last names, however fictitious names are allowed with the exception of Law firms. In choosing a fictitious name, however, make sure that the name isn’t already in use. A name search therefore has to be conducted. This is of course easily done through a search at the Registrar’s.
2.CONTRIBUTIONS TO THE PARTNERSHIP
As partners, it’s important to determine which partner is going to contribute cash, property, or services to the business before it opens. And what percentage of ownership each partner will have.
3.ALLOCATION OF PROFITS, LOSSES, AND DRAWS
One of the most sticky issues to sort out in a partnership is money. To make this easier it’s important for partners to ask themselves these questions:
- Will profits and losses be allocated in proportion to a partner’s percentage interest in the business?
- Will each partner be entitled to a regular draw (a withdrawal of allocated profits from the business) or
- Will all profits be distributed at the end of each year?
You and your partners may have different financial needs and different ideas about how the money should be divided up and distributed, it is therefore important to discuss this.
Acts done by each partner bind the partnership. Therefore it’s important to discuss and put in writing if there are certain decisions that have to be made with the consent of both parties. For example, sale of the partnership assets.
5.PARTNERSHIP DECISION MAKING
It is important to discuss how decisions will be made. Whether they are day-to-day decisions or major decisions such as taking out loans. It’s important to also determine the weight each partner has in these decisions.
Management details may be hard to determine at first but a through look at the management needs of the partnership will get you well on your way. This could include:
- Who will keep the books?
- Who will deal with customers?
- Supervise employees?
- Negotiate with suppliers?
7.ADMITTING NEW PARTNERS
Eventually, you may want to expand the business and bring in new partners. Agreeing on a procedure for admitting new partners will make your lives a lot easier when this issue comes up.
8.WITHDRAWAL OR DEATH OF A PARTNER
As important as the rules for admitting new partners, to the business, are the rules for handling the departure of an owner. You should set up a reasonable buyout scheme in your partnership agreement.
If you and your partners become deadlocked on an issue, do you want to go straight to court? It might benefit everyone involved if your partnership agreement provides for alternative dispute resolution, such as mediation or arbitration.
For future certainty and reference you may need to put all your decisions down on paper via a General Partnership Agreement.
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