A Partnership is all about an agreement between two or more business partners who sign a contract to start a profitable business together. In the Partnership agreement, all partners are equally responsible for the debt of an organisation. The agreement also contains general partnership rules, like withdrawals, profit and loss distribution, capital contributions and financial reporting. If one partner withdraws his/her partnership, they are liable for an already existing debt, and future liability if they do not provide any proper notice of retirement.
Benefits or Importance of partnership deed
A few important advantages of a balanced partnership deed are listed:
- It controls and monitors the rights, duties and liabilities of all the partners.
- It help to avoid dispute between the partners.
- Avoids misunderstanding on profit and loss distribution ratio among the partners.
- Individual partner’s responsibilities are mentioned clearly.
- It also defines a remuneration or salary of the partners
- It clearly mentions who does what. Individual partner’s roles can be defined.
- It ensures smooth running of the operations of the firm.
What should a partnership agreement include?
- The name of the firm.
- Name and addresses of the partners.
- Nature of the business.
- The duration of the partnership.
- The amount to be contributed by each partner as capital.
- The amount of drawings that can be made by each partner.
- The amount of interest to be allowed on capital and charged on drawings.
- Rights of partners.
- Duties of partners.
- Remuneration to partners.
- The method used for calculating goodwill.
- Profit and loss sharing ratio.
Types of partnership agreements
When deciding how to draft a partnership agreement, you must first consider the different types, which include:
1. General partnership (GP)
A General Partnership is a business arrangement by which two or more individuals agree to share in all assets, profits, and financial and legal liabilities of a business. In a general partnership, every partner agree to unlimited liability, meaning liabilities are not capped and can be paid through the seizure of an owner’s assets.
2. Limited partnership (LP)
Limited Partnership have at least one general partner who is completely responsible for the company. Also, one or more limited partners supply funds but are not involved in business management, and they only have risk for the amount they invested. Limited Partnership are formal business entities, meaning the state must authorize them. While limited liability, LPs also keep the same flow-through tax treatment and much of the same contractual flexibility as a general partnership.
3. Limited liability partnership (LLP)
A limited liability partnership is a partnership in which some or all partners have limited liabilities. In an LLP, each partner is not liable or responsible for another partner’s negligent or misconduct. LLPs are similar to general partnerships in the way that all the partners are actively managing the company. Every partner have full responsibility for the business’s debts and legal liabilities, but they aren’t accountable for the errors and omissions of the other partners.