Question

Do I really need a formalized partnership agreement drawn up and what type of information should a partnership agreement contain ?

If my partner has a lot of personal debt should this affect my decision about whether or not to go forward with this business venture ? Why or why not?

Answer 1

A partnership agreement, also known as partnership deed is an agreement between partners agreeing to the mutually decided terms and conditions of the partnership. It outlines the rights and obligations of the partners in detail, relating to the operations of the partnership firm. It is enforceable by law, and hence acts as a guiding tool to the partners to perform their duties, helping to avoid any disputes among the partnerss.

Yes it is really important for you to formalise a partnership agreement to be drawn up, so as to avoid the uninvited troubles. Also it is necessary for clarity in roles and responsiblities or obligations of the partners in the operations of the business also during the winding up of the business.

It needs the following informations:

1. Investment share: It contains the information as to the invested capital by each partner. The share of investment by each partner at the time of investment, hence it contains the ownership of each partner in the business.

2. Accounting method: It contains guidance related to the financial year of the organisation, which standards do the firm follow, etc.

3. Winding up of the partnership: In case the partners want to end the partnership, the agreement contains information as to what could be the claim of each partners at the time of winding up of the partnership firm. It contains the right of the partners over the assets of the organisation, in case of winding up of the organisation.

4. Profit sharing ratio: The profit sharing ratio can be different than the investments ratio of the partners. The profit sharing ratio among the partners is clearly defined in the partnership deed, hence no confusion in the distribution of the profits.

5. Withdrawals: If any of the parner wants to make an early withdrawal from the partnership firm, what could be the payout of the partner is clearly mentioned in the agreement.

6. Expulsion of a parner: Under what circumstances a partner can be expelled from the partnership is mentioned in the agreement. In case of expulsion, what would be the share of the partner to be paid off by other partners. The rights of the expelled partner over the firm, is clearly mentioned in the partnership deed.

7. Disputes settlement: The goal of the partnership agreement is to avoid expensive litigation cost among the partners, hence provide provision for arbitration of disputes among the partners.

If my partner has a lot of personal debt should this affect my decision about whether or not to go forward with this business venture ? Why or why not?

If your partner has a lot of personal debt, it has nothing to do with the partnership firm, it has no concern to the business you want to venture with him. However, the credit rating of the partner in honouring the debts has impact on the business for availing finances. The partnership firm in order to avail cheap finance from the market, needs a good track record of the partners, if the partner has a financial history of huge debts and not honouring debts on time, it will affect the credibility of the business for availing the loans for the business.