A business partnership agreement is a legally binding contract between individuals or entities that establish a business together. The purpose of this agreement is to outline how the business will operate and set clear roles and expectations for each partner.
What is a Business Partnership Agreement Review?
A business partnership agreement review is when a party to the contract or a legal representative carefully reads and analyzes the terms outlined in the contract. Contract review is essential to ensure that the contract is free from mistakes, reflects the agreements made between the parties, is legally binding, and follows all applicable laws and regulations.
When reviewing a partnership agreement, be sure to look for the following provisions:
- Partnership structure. The contract should clearly identify each party and their role in running the company. It should also include each partner’s initial capital contribution to the partnership and their obligations for ongoing contributions.
- Profit and loss sharing : When reviewing the agreement, be sure that the provisions regarding profit and loss sharing accurately describe how profits and losses will be distributed among the partners. This should include specific percentages or formulas used for allocation.
- Decision making. Procedures for making decisions like voting rights and responsibilities need to be clearly outlined. This section should include any required unanimous or majority consent for certain actions.
- Partner withdrawal or termination : Carefully examine the provisions related to partner withdrawal, retirement, or termination. The contract should include a process for valuing the partner's interest in the partnership.
- Dispute resolution. It is essential for a partnership agreement to lay out procedures for resolving disputes among the partners. The contract can order mediation, arbitration, or negotiations. This helps the partners avoid costly and potentially damaging litigation for issues arising during the course of business.
- Confidentiality, non-compete, and other restrictive clauses. To protect the interests of the company, a partnership agreement should limit the partners’ ability to leave the company and then form a competing company. Partnership agreements should have restrictive covenants that protect trade secrets, intellectual property, and other sensitive business information.
If you are unsure what terms or provisions should be included in your business partnership agreement, always consult a business lawyer for legal advice and guidance. A lawyer can review your contract for you to ensure that it adequately protects all partners and will be legally enforceable if necessary.
Issues to Consider When Reviewing a Partnership Agreement
A business partnership agreement should cover all necessary topics to protect the partners, establish a good working relationship, and allow your business to run successfully.
When you are reviewing your partnership agreement, ask yourself the following questions:
- Does the agreement outline the roles, responsibilities, and rights of each partner?
- Does the agreement align with each partner’s intentions and business objectives?
- Is there a formula outlined for determining profit and loss sharing?
- Are there clear procedures for voting and making business decisions and are these procedures fair?
- Does the agreement create a procedure for leaving the partnership?
- Does the agreement outline important financial matters like accounting practices, financial reporting, and banking arrangements?
- Are there fair and effective procedures for settling disputes among the partners?
- Are the interests of the company protected by the agreement?
- Does the agreement abide by all local laws, regulations, and industry standards?
- Are any terms of the contract unclear, ambiguous or unconscionable?
If you can answer all of these questions when reviewing your business partnership agreement, it is likely that you will have a well-drafted agreement that is fair and protects all the partners.
3 Topics to Cover in a Business Partnership Agreement
A business partnership agreement needs to address a variety of issues to ensure that the company runs successfully. However, the three most important topics that must be covered in a partnership agreement are ownership, profit and loss distribution, and roles and responsibilities of each partner.
- Ownership. Not all partnerships are owned equally between partners. When one partner contributes more capital, they will likely own a higher percentage of the company. The agreement must identify each partner’s percentage of ownership in the company, which will affect the way profits and losses are distributed.
- Profit and loss distribution. The business partners need to agree upon a method for calculating and distributing the company’s profits and losses. The percentages and formulas used to make these calculations should be written into the partnership agreement. Most disputes in a partnership arise from financial matters so ensuring that this section is clear, detailed, and fair is essential to running a successful business.
- Roles and responsibilities of each partner. A partnership agreement should establish the framework for the day-to-day operations of the company. To do this, each partner’s roles and responsibilities need to be clearly defined. This section can include management structure, division of labor, and how each partner will use their expertise or skills to benefit the company.
3 Disadvantages of a Partnership
Partnerships can provide business owners with a lot of benefits like additional skills and unique knowledge, more capital, and help with business tasks. However, a partnership will also have its drawbacks.
Three disadvantages of a partnership include:
- Shared liability. Each partner in a partnership have joint and severable liability. This means that each partner is personally liable for the partnership’s debts and obligations. If one partner makes a bad financial decision or acts recklessly, all partners will be liable for the mistake.
- Loss of independent decision making. When you are part of a partnership, you lose the right to make independent decisions about the business. Any important decisions will have to be agreed upon by all parties by the voting methods outlined in the partnership agreement. This can give rise to disputes and a strained working relationship among the partners.
- Split profits. While additional capital from partners is great for getting a business off the ground, once the company starts turning a profit, all profits are split among the members. If there are a lot of partners, individual profits could be relatively small.
Before establishing a partnership, it is important to consider the benefits and drawbacks of each type of business entity to decide what is right for your company and business goals.
Should I Hire a Lawyer to Review My Business Partnership Agreement?
Yes. It is always highly recommended that partners hire a lawyer to review a business partnership before agreeing to sign the contract. A lawyer can provide partners with valuable legal insight and identify any potential issues with the contract.
The lawyer will carefully review the contract to ensure that it is free from mistakes that could lead to a dispute and adequately protects the interests of all partners. An experienced lawyer will be familiar with all local laws governing business contracts and will ensure that the contract is valid and legally binding.
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