The essence of having a formal partnership agreement is, to avoid exposing your business to future risk.
Having a business Partner, without a formal agreement, can spell disaster, for you and to your business.
Going into Partnership, for instance, with a Partner, who has serious health challenges may pose a threat to the sustainability of your business.
The purpose of having a Partnership Agreement is to guide the business, in the eventuality of the inevitable.
It also states the rules and regulations of each Partner and also to protect against future emergencies, such as death, fire outbreaks, etc.
Here are 7 reasons to formalize Partnership Agreements:
Death: Death is an inevitable part of life. It is a natural life event, bound to happen to every human.
A formal Partnership Agreement is needed in case of unforeseen circumstances, so your own stake in the Partnership can be handed over to your family.
Also, part of the agreement is for you to decide if you want your family members to get involved in the running of the business.
Disability: Any of the partners can get disabled along the line which can be caused by accidents leading to amputation, spinal cord damage which can restrict you to a wheelchair.
One way to deal with this is having an insurance policy, which states that, if a partner is able to perform under a period of time, the Partner is liable to disability payment under the disability policy.
Transfer of partnership interest: In this situation, both partners will be well and none of them is disabled, but the other partner wants to retire.
The Partnership Agreement policy comes in relevant. They decide if either of them is to sell their shares to the other, or, sell to a third-party, who is ready to purchase.
Right of first refusal: Here, before you sell out your shares to the third-party, your Partner has the right to bid with the third-party, before the selling Partner sells to the purchaser.
The Partner can, either, match the offer for the shares, or, the purchaser, who is the third-party, will win the bidding process and purchase the shares.
Keyman insurance: This is a business insurance policy directly owned by the Partnership. The Keyman here, are the Partners, who have direct access to the business.
They are insured, when one of the Partners dies, they receive the proceeds of the policy. The Partnership Agreement drafted, determines how the money gets paid , either, through the purchase of shares in full or installment.
Financing: Here, your Partner is about to retire and you need to pay him some money for his shares. You set up an installment payment plan to pay for a certain period.
Valuation of business assets: This is dependent on how big your company is. To know the net worth of your company and the basis on which the company’s valuation should get conducted, you may have to bring in an expert.
The main reason every Partnership company is advised to have a formal company agreement is to take care of unforeseen circumstances that may occur in the future and will need documents to back up certain claims and there will be nothing to present if no agreement was made.
When you have written and well-codified documents, business becomes easier for both parties.