Creating a business partnership agreement is very important when a business involves two or more owners.
Even if you’re just starting a business today, never neglect the importance of a written partnership agreement.
Gone are the days when business owners carry out transactions emotionally because of friendships and family relationships.
People used to do business based on familiarity because they live in the same neighborhood and speak the same language.
However, this practice is now obsolete because of the negative effects of not creating a business partnership agreement.
Today that system of business operation has changed, people have realized the need to have a business partnership agreement.
No successful entrepreneur will ever venture into partnership without a written agreement.
Therefore, one of the signs of a good entrepreneur engaging in partnership is to create a partnership agreement.
Okay, just before we move on, let’s know the meaning of partnership, what is partnership?
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What is partnership?
Partnership is an association between two or more people to achieve a common goal.
According to Wikipedia, partnership is an agreement between business partners in cooperation to advance their mutual interest.
It’s an agreement between two or more people doing business or running a project to reach a particular goal.
It involves working together as one to achieve a set down plan.
They take decisions together and carry the responsibilities to see progress in the business.
As the saying goes: no man is an island, every human needs another person to get things done.
Partnership promotes rapid growth and expansion in business.
It also helps to increase the available capital in a business due to contributions from different partners.
Here is a good guide on 12 fantastic ways of getting money to start a business, consider checking it out.
Types of partnership:
Let’s quickly examine the 3 types of partnership in business today and how it works.
1. General Partnership:
General partnership is one of the most common type of business partnership today.
It’s common today among small businesses and team of friends starting up a business.
I call it the 50/50 type of partnership, every partner has equal rights.
Here, each partner equally shares the workload, management operations and decision makings.
They also share the profits and bear the losses in the business together.
There is no dormant partner in general partnership, everyone is active.
Hence, it requires the active participation of partners in running the business.
For Instance, Mike and Jane wants to open a unisex saloon for male and female hair dressing.
They might decide to name the business M.J hair saloon services.
In such scenario, the business is fully owned by Mike and Jane.
Therefore, they have equal responsibilities and ownership.
2. Limited Liability Partnership:
In a limited liability partnership, some partners aren’t directly involved in the daily running of the business.
Hence, we call these partners – limited liability partners.
Such partners only contribute financially and don’t actually take management decisions or hire and fire staffs.
However, there are general partners who take decisions and oversees the daily running of the business.
Limited liability partners aren’t liable for taking major business decisions.
Nevertheless, they are accountable and liable to the amount of money they have invested.
They also maintain limited contributions and involvement based on their shares in the business.
This type of partnership offers great flexibility in management, ownership and decision making.
A limited liability type of partnership allows multiple buyers and external investors to buy ownership stakes in a business.
3. Joint Partnership or Venture:
Joint partnership or venture is usually for a short period of time.
It could be for the purpose of carrying out a project, which is dissolved when the project is completed.
Joint partnership could be entered to develop a new product.
For example, when a foreign company wants to do a local project in another country, a joint partnership is formed.
This will enable the foreign and local company work together to succeed.
Therefore, joint partnerships are mainly for short term projects.
Such partnerships can easily be shuttered at the end of the project.
However, after a successful project, partners can sign for general partnership as it suits them.
11 Benefits of partnership in business:
- There is clear division of labor in partnership, which reduces the workload on individual partners.
- Partnership offers huge tax breaks when compared to a one man business.
- Greater availability of working capital from partners.
- Precise and better decision making can be achieved because of separate partners experiences.
- Increased borrowing capacity from multiple partners.
- The weakness of a single partner in covered in partnership.
- Losses are likely not to be a threat in partnership because of multiple owners.
- Rapid growth is highly possible because of the diverse strength of partners from different perspective.
- Partnership promotes uniformity and oneness among business owners.
- Efficient management structure is available in partnership because of multiple business owners.
- Partnership helps to limit external regulations.
What is a business partnership agreement:
A business partnership agreement is a legal document signed by two or more business partners explaining the rules guiding the business.
Hence, it’s operates on terms and conditions as agreed by the business owners.
It’s a written document that carries the consent and approvals of all partners in a business.
It contains the management strategies and how partners will distribute profits as the business grows.
It also covers how the business will be operated, the rights of each partners and their percentage shares.
Therefore, the do’s and don’ts of partners, responsibilities of partners and how to handle disputes are clearly written down.
Any legally written business agreement that exist between 2 or more people is said to be a business partnership agreement.
Hence, it can also be endorsed by a business attorney to validate the agreement of partners with legal backing.
How to write a business partnership agreement:
What are the most important factors needed in a business partnership agreement and how do we write it.
1. Name of partners:
The name of individual partners must reflect in the business partnership agreement.
This includes both the first names and last names of partners.
All partners must have their names as owners in the partnership agreement.
2. Business name:
All partners must agree to a business name.
In a situation where there are two partners, they might choose to use their first names or last names.
Example: Bright Simon and Philips James needs a good name to set up their new construction company.
Hence, they might decide to name the company Bright Philips Construction Company Limited.
Alternatively, they might call it James Simon Construction Company Limited.
However, they might choose to register a separate agreed name which also applies when their are more than two partners.
3. Purpose of partnership:
A partnership agreement defines the main purpose of partnership which also includes the interest of owners.
The partnership agreement must preserve the rights and obligations of all partners.
Hence, state the rules of disengagement in case a partner decides to pull out before completion of projects.
4. Terms of business partnership:
Which partners will be in charge of business decisions?.
Will decisions require partners to vote their interest and majority wins the vote?
How long is the said partnership?
What are the guiding rules and how will disputes be settled if any arises?
Will there be reasons to visit the court, if not what will be the solution?
Therefore, these are vital information’s to document in writing a business partnership agreement.
5. Contributions of partners:
What will each partners contribute to ensure progress is made.
Some partners will provide finances, others will bring machinery, man power and everything needed to make the business succeed.
Which partner will pursue for clients and customers?
Who will be in charge of online marketing, sales, advertising if needed and other important business demands.
Which partners will ensure suppliers are delivered hitch-free to customers?, in situations where you sell products, very important.
6. Management and control of partnership:
The business partnership agreement must state how the business will be controlled.
Which partner will be in charge of documents?, who will keep the records?, who will reach out to customers for sales?.
How will supplies be made?, who will handle customers request?
Who are the partners to hire and fire workers and carry out supervision of work?.
Therefore, a good business agreement must solve future troubles before it comes up.
7. Profit and loss:
How will profits be distributed among partners?, will partners earn their profits monthly, quarterly or annually.
The financial needs of partners will differ. Hence, how the profits will be distributed is very important.
Partners will also carry their loses according to their percentage share and investment in the business.
It’s important to state these factors in the business partnership agreement to avoid unnecessary future troubles.
8. Partner’s bank:
Business owners might decide to use one bank to enable clarity of financial transactions.
The use of a single partnership account will eliminate any form of mismanagement of funds.
All partners must be a legal signatory to the business account.
Hence, with-drawer of money from the business account must be with the consent of partners as stated in agreement.
14 reasons you need a business partnership agreement:
- It enable partners know their roles, duties and responsibilities without been told.
- It promotes discipline among partners who may not be serious to play their part.
- Allocations of profits, loss and draws are clearly stated in a business partnership agreement.
- The withdrawal or death of a single partner will not close down the business.
- Transfer of ownership is easy with a written partnership agreement.
- It eliminates the risk of disagreements and disputes among partners.
- It shows how partners will operate the business and make changes if necessary.
- Dissolution of partners are cheaply carried out as stated in the partnership agreement.
- It’s easy to admit new partners as the business grows as written in the agreement.
- All partners will know their percentage share of money according to their investments.
- It simplifies the process of buying more stakes by showing the conditions to meet as a partner.
- It imbibes uniformity among partners because each partner will be equally responsible for the actions of another partner.
- It’s the easiest way to manage business owners with different background and belief systems.
- All partners involved will have a copy, hence promoting clarity and oneness.
A friendship founded on business is better than a business founded on friendship – Rockefella Partnership quoteJohn D. Rockefella, Business Giant and Oil Mogul
Also Read This: 8 Major Reasons Why Entrepreneurs Fail in Business
10 Factors to consider when choosing a business partner:
- Check a partner’s attitude and willingness to work.
- Ascertain his decision making capabilities.
- Check how such partner controls his current business before choosing a partner.
- The management abilities of partners must be put into consideration before signing a business partnership agreement.
- Time management ability of a partner is crucial when choosing a business partner.
- Experience is important when choosing a partner, what level of experience do partners have about the business?
- The creativity and skill set of each partner is a vital requirement.
- The interest of partners must be uniform. It takes common interest and passion to work together.
- Partners must carry the same vision to make the business succeed.
- Variability of strength is a major importance, all partners must have capacities in different areas to cover the business weakness.
Never underestimate the powers and importance of a business partnership agreement.
It’s plays a vital role in accomplishing great business projects.
However, it takes good level of commitment to make partnership work.
Two heads are better than one, Oh yes it is.
There is a high possibility of success in partnership because of the varied strength and contributions from partners.
Partnership increases working capital, promotes uniformity and gives tax breaks to business owners.
It’s important to check partners willingness to work, reliability and level of commitment.
Hope you now have answers to your findings on business partnership agreement.
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