How to Prepare Business Partnership Agreement
Content of Business Partnership Agreement.
Business partnership is the relationship that exists between two or more persons (but no more than twenty) who come together to carry on a trade or business. People are attracted to business partnership because of the advantages it has over sole proprietorship.
If you want to consider business Partnership, you should ensure that you involve people you can trust. Besides, it is always advisable to draw your business partnership agreement. The specific terms of the agreement will be determined by the partners. This agreement is called business partnership deed. The partnership agreement should contain the following information:
Names and addresses of the firm and each partners
The business partnership agreement should clearly spell out the names and addresses of the firm and that of each partners. The address should be traceable. Therefore P. O. Box is not considered as a good address.
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Nature of business to be carried on and the location of the business
The business partnership deed should communicate the nature and the location of the business. This has to be updated in case of a change of the business location.
Duration of partnership, whether for a fixed period/job or not
Business Partnership may not necessarily mean that the partner will be a life partner. Business Partnership may be for a specific project or job. If that is the case, the partnership deed should state the duration of such business partnership.
Capital contribution by the each partner
One of the reasons for forming a business partnership is for them to be able to raise enough capital for the business. The partnership deed should indicate the capital contributed by each partner. Even if the partners contributed the same amount, it is important that the amount contributed by each partner is mentioned.
Profit sharing ratio among the partners
The profit sharing ratio may be based on certain parameters. It can be equal or based on capital contributed. Whatever the method used in calculating the share of profit, it should be included in the partnership deed
Interest on capital, if any to be paid to partners
In a situation where partners do not contribute equal amount as capital, there may be an agreement to pay interest on capital invested. This will be included in the business partnership deed.
Drawings and interest on drawings, whether permissible or not
As the business grows, partners may have reason to draw from the capital contributed. The partnership agreement will specify whether drawing should be allowed. If allowed, at what interest rate.
Loans and advances by partners to the firm
In a period of cash shortage, any of the partners may be in position to lend money to the firm instead of approaching banks for loan facility. The partnership deed will specify loans from partners and whether the firm will pay interest on it or not.
Whether or not to pay salary or commission to partners who will manage the business
In business partnership, one partner will be more active in one way or the other. The partnership deed will state explicitly whether such partner(s) should be paid salary or commission.
Rights, duties and responsibilities of managing partner
Rights, duties and responsibilities of the managing partner should be communicated in order to avoid abuse of office.
Other information you need to resolve in any business partnership include the following:
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- Methods of keeping accounts, who and how to audit the accounts.
- The bankers and the maintenance of bank accounts
- The mode of admission and retirement of partners
- How to value the goodwill on admission, retirement and death of a partner
- Method of settlement of accounts on retirement and death of a partner
- Provision for arbitration in case of disputes
- The methods of dissolution of partnership firm
- Settlement of accounts in case of dissolution of the firm