IndiaMART Knowledge Services: Legalities for SMEs: Writing a Partnership Agreement

Tuesday, January 11, 2011

Legalities for SMEs: Writing a Partnership Agreement

Legalities for SMEs are critical
For any small and emerging business, legal aspects of the business are one of the most crucial and critical to follow and get into. Each geography of the world has a certain way in which it functions and so are the laws.

The knowledge team at IndiaMart is committed to creating opportunities for the Indian SME, which enable smooth functioning and hence add onto the economic growth. This blog aims at making the readers understand the partnership form of business a little more closely and formally.

Partnership: the Start-up!
Many small businesses in India are initiated as partnerships, partners could be in the form of friends known to each other, within the family etc.

If you're in a partnership, it's highly advisable to have a formal, written partnership agreement.

While it may not be a mandate required by the law, a partnership agreement enables the partners, in designing a strong framework for defining each partner's:

obligations
settling the conflicts
disagreements and other difficult-to-resolve issues

that naturally occur in nearly every business relationship. This ultimately helps in ensuring the long term healthy sustenance of your business.

Starting the Partnership Agreement Creation
Create your written partnership agreement with the assumption that anything at anytime can go wrong with your partnership. There can arise frictions between partners over trivial issues such as money, power or ego. There should all possible "what-if" situations taken care of in the partnership agreement. You will always see that the agreement will make things clearer and more structured for your business and its healthy sustenance.

How can you save money in the application drafting process
Drafting the first phase of the application process and then taking it to your attorney will at least help you save on the initial consulting cost. Some of the pointers below can help you in drafting the first level of your Business Partnership Agreement:

Basics:

name of the partnership?
purpose of the partnership?
duration of the partnership?

Responsibilities, remuneration and the role:

Define each partner's role?
Define each partner's responsibilities in the business.
What commitments in terms of time do each partner needs to make?
Define the income of each partner, and structure the P&L distribution *this always creates issues if not drafted well enough

Contributions

Define each partner's contribution to the partnership in terms of cash, assets, loans, investments, and/or labor?
Future seeking : Are there any additional contributions to the partnership expected in the future from any of the partners, and if so, how will they be handled?

Self Exit/ Expulsion of existing partners/ New partners joining

Any specific guidelines to be followed if one partner wants to leave the partnership?
How will any of the partner be allowed to sell his/ her stake to any external entity?
Define and set terms for expulsion for the partners *this has to be clearly set and athered to
Define clearly the terms for the New partners and how will they be allowed into the business, will they work on the same terms as the partners before?

Resolving Disputes

Define clearly the methods that will be used to settle disputes that can't be otherwise resolved?
Will you use mediation or binding arbitration?

Handling Finance

Who handles the banking matters and what arrangements are made for the partnership?
Define, if all the partners or some designated ones are signatory authority on signing cheques
Who will oversee book-keeping process?

If the partnership needs to be dissolved?