It is extremely important to form a water-tight agreement, before starting a business in collaboration with a partner(s) to make sure that all the partners are on the same page with respect to the firm’s understanding. It mentions the percentage of ownership of the partners, their share in profits, their liabilities, their rights, responsibilities and duties, the duration of partnership and conditions for termination of the partnership, etc. A partnership is a less formal operating structure than an incorporation which can protect owners in the event of the death of one partner, a dispute, a sale to a new partner or the dissolution of the business, among other benefits.
Our team at IPLF are well versed with all factual and legal scenarios that are primarily required to engage in drafting a sound Partnership Agreement.
1. Understanding requirements
The process starts with understanding the requirements of both/all the partners and the purpose for which the partnership is being proposed.
After this, a thorough discussion will take place between the partners to finalize the terms of the partnership deed.
3. Drafting and finalizing
After the discussion between the parties, a partnership deed shall be drafted by a professional skilled in the art, which, post review by the partners, is finalized.
- Name and address of the firm
- Name and address of the partners
- Nature of business that is to be carried on.
- Date of commencement of the business.
- Duration of partnership as decided between the parties.
- Capital contribution by each partner.
- Profit-sharing ratio as decided amongst the partners.
1. Should a partnership deed be registered?
As per the Partnership Act 1932, it is not compulsory to register a partnership firm. The firm does not have a separate legal identity, and registration will not alter this fact. However, registration is a definite proof of the existence of the firm and its legality.
2. How do partnerships terminate?
In the absence of a written agreement, partnerships end when one partner gives notice of his express will to leave the partnership. If you don’t want your partnership to end so easily, you can have a written agreement that outlines the process through which the partnership will dissolve.
3. What is the difference between a partnership and forming a corporation?
One major difference is that in a partnership, creditors can sue you personally to repay business debts, whereas if you form a corporate entity, such as a limited liability company (LLC) or an S-corporation, the debt trail ends with the business.
4. Is it mandatory that the partnership agreement be in writing?
Partnerships are unique business relationships that don’t require a written agreement. However, it is always a good idea to have such a document.
5. What are the advantages of forming a partnership?
- Easy to establish
- Raising funds may be easier with more owners
- Profits go right into partner’s pockets, providing for easier tax reporting
- Partners can combine their individual talents to complement each other and strengthen the partnership
- Employees may be attracted to work for the partnership if they have an opportunity to become a partner
6. What are the disadvantages of forming a partnership?
- Partners are individually liable for business debts;
- Partners are subject to the actions of other partners;
- Limited life of a partnership, wherein the partnership can end if one partner leaves
- Shared decision making, meaning that you don’t have full control, which could lead to disagreements or paralysis of the partnership.