What Is A Partnership Agreement Its Categories And Importance

A partnership agreement is an agreement between two or more individuals who have signed a contract to start a profitable business together. In the Partnership agreement, the partners will be equally responsible for the debt of the organisation. Even when one person withdraws his or her partnership, he or she will be liable for an already existing debt, future liability in case they do not provide with a proper notice of retirement. A partnership, sometimes, can also exist even without signing any scripted agreement, in these cases law regulating the partnership would apply as well.

Some of the important elements for a partnership agreement have been mentioned below:

• Type of business to be started
• The contribution of a fund by every partner
• Rights and responsibilities of every partner
• The percentage of ownership as well as profit and loss to be distributed amongst each partner

Categories of Agreement

Partnership Agreement can be classified into three categories, these are-

• General Partnership
• Limited Partnership
• Silent Partnership

Importance of a Partnership Agreement

A partnership agreement is necessary in order to keep away the disagreement, confusion or any other change which might occur during the course of business tenure. Mentioned below are a few points which describe as to why a partnership agreement is important:

• To specify distinguished roles and responsibilities for each partner.
• In order to avoid tax problems, the tax status shows that the partner is dispensing profits to each partner on the basis of accounting practice and acceptable tax.
• If there is any dispute with any of the partners, it would help you avoid any issue of liability or any other unnecessary problem. 
• It will help deal with any lifestyle or circumstance change with any of the partners. They usually deal with buy-out agreements with individual partners.
• To surpass non-compete agreements or any other conflict of interest with partners at some later stage.

Partners Contribution & Percentage Distribution

• Partner contribution can be in a different amount and type, such in terms of cash, idea or even partner’s time on a job. In this manner, it is not important that every partner would have to contribute in cash only. Hence, the partners can make equal inputs to the business and have equal rights, however the inputs could be in other different forms other than cash as well.
• As each partner would have distinct responsibilities and strength, partnership shares will be 100% impartial from a financial point of view.
• The partnership percentage could be estimated by calculating the total cash which would be required to invest when starting a new business and divide each partner’s share with the total.
• The role each partner would play when starting the company and the amount of work and time contributed could also be a deciding factor when calculating the percentage of proprietorship as much as financial offerings.

How does the Partnership Work?

Partnership in Business

In business, there are two kinds of partnerships. They are-

General Partnership

It could be formed when two or more individuals enter into an agreement to start a business and make profits. Generally, no written agreements could be  made in this partnership but all joint and various liabilities of the partners are shared.

Limited Partnership

The partner would invest money but would not operate or involve themselves when operating a business. This partnership shall be formed legally and by creating an agreement.

Conclusion

A partnership agreement is one of the basic requirements for the registration of a partnership firm. The list of contents of partnership agreement can vary across firms, based on various criteria. In case there is a need for change in the contents of partnership agreement drafted originally, then any change could be brought with the mutual consent of all the partners.

It would, therefore, be favourable to appoint an experienced advocate to draft the partnership agreement so as to ensure that the conditions of the agreement remain watertight. 

Lead India offers you a team of experienced advocates who have been dealing with various legal procedures including drafting documents, negotiations for businesses, etc. Hence, if you wish to talk to a lawyer or seek free legal advice online, you  may contact us.