In this article we will like to highlight the important aspects on why it is critical that small businesses analyze 'partnership agreements' and its legal implications.
A partnership agreement can be defined as a legally binding agreement between the partners of a company that outlines the roles and responsibilities of each partner and includes the very structure of how the business is to be managed. The partnership agreements can be simple or complex depending on the scope of the business operations. It is essential that partnership agreements be entered into to ensure that the rights of each partner are clearly protected and similarly the obligations of each partner are laid out in writing in clear language. This ensures to bring in a defined structure that is legally enforceable especially in the instance of a dispute. A partnership agreement is therefore a legally binding key document that exists between the partners, which particularly determines the control, and management of the company.
Partnership agreements come in many forms and can be simple or complex depending on the scope of the business structure of a company. In the UAE partnership terms are generally in the form of the 'memorandum and articles of association ' of a company. These constitute the integral incorporation documents of a company and are mandatory to be registered with the concerned department of economy or the concerned free zone authorities in case of free zone companies.
It is essential to take proper legal advice from corporate lawyers before entering into a partnership agreement. A corporate lawyer can assist you in drafting a partnership agreement and advice you on the pro and cons of the major terms and how you can protect the best interests of the company in the long run. It is best to seek legal help while drafting a partnership agreement and to understand in depth the legalities of the key terms on which the partnership is to be founded.
Some of the major factors that make partnership agreements indispensable are the following:
- Determines the business activities: A partnership agreement determines the objectives of the company that constitutes the foundation on which the company is being instituted. In case of future expansion or addition of different activities to the company's portfolio the consensus of all the partners might be required and further the agreement has to be amended to reflect the new objectives.
- Capital Contribution: The partnership agreement determines and includes the capital contribution, which constitutes the paid up capital of the company. This is recorded in the agreement and accordingly the share capital is divided amongst the partners.
- Profit Distribution: The profit distribution constitutes an essential part of the partnership agreement the profit share of each partner is clearly demarcated in the written agreement This allows for clear and transparent processing of profits and its distribution to the partners upon completion of the audited financials of the company. An interesting facet of profit share as compared to shareholding in a company is that the profit share can be determined on a higher percentage for one partner irrespective of the control on the shareholding.
- Financial reporting: The partners agree on how the financial reporting and auditing is to be completed in the company and especially how the audited reports are accepted formally every year by the board of directors in the company.
- Decision making protocols: The partners agree in advance in the partnership agreement as to how the voting mechanisms will work within the company when key issues are to be determined. The voting rights of the shareholders of the company and the minimum voting percentage required for key decision to be accepted are pre-determined and agreed in the partnership agreement enabling smooth operations.
- Share transfers: The partnership agreement often includes certain key terms that allow 'preemptive rights' to existing partners. By including preemptive rights in the partnership agreement an existing partner ensures that he is allowed the choice of buying the shares of the other partner firsthand before the said shares are sold to any other person. An existing partner thus ensures the protection of this interest legally by incorporating the said term.
- Dispute Resolution: The partnership agreement also includes the dispute resolution forum and by pre-determining the same and ensuring to include certain mediation possibilities before proceeding with litigation ensures that disputes, if any, between the partners can be attempted to be amicable resolved in the first instance.
- Removal of a partner: The partnership agreement also includes clause that determines the voting rights required to vote for the removal of a partner and also the pre-determined condition based on which a partner can be removed such as when a partner acts in bad faith against the company's best interest etc.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.