We draft, negotiate, and review partnership & joint venture agreements to ensure your business stands on a solid legal foundation before moving forward.
What is a Partnership Agreement?
Partnership agreements are legal documents that explicitly detail the relationship between the business partners and set out their individual obligations and commitments.
A proper partnership agreement should cover all possible business solutions that may arise in the course of partnership.
One of the most important clauses to be included in a partnership agreement is the buy-sell agreement.
A buy-sell agreement sets out the terms of a buyout in the event death, divorce, disability or resignation.
There are two primary structures for buy-sell agreements.
The first one is cross-purchase agreement, in which the remaining share owners buy the stock of the departing owners or his partnership interest.
The other key structure is stock-redemption agreement, in which the company buys the stock of the departing partner.
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Partnership Agreement Essential Provisions
Apart from a buy-sell agreement, there are also some additional elements that may need to be considered when drafting a partnership agreement.
Discuss decision-making process
A partnership agreement should talk about decision-making process within the company, especially in the event where there is no consensus reached on an important matter.
Individual capital contribution
Include a section to address how much money each partner should contribute to starting the business, namely, capital contribution.
The section should also detail what will happen when there is no sufficient initial influx of money before generating profit. It is always good to plan for the worst scenario ahead of time.
Funds allocation
Specify the time when partners are able to take money out of the business and get repaid for the investments they put in.
This section should explain the ways how the money will be allocated among the owners.
Dissolution term
Last but not least, is the dissolution term, which nobody wants to ever talk about, but bears extreme significance.
The dissolution terms provide solutions when partners do not get along well, or when one of them intends to terminate his business relationship with others.
It is important to discuss exit strategies beforehand in a partnership agreement, when everyone is working to make the business take shape.
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Joint Venture Agreement
The purpose of a joint venture agreement is to outline the financial contribution and obligations of each member, the duration of the joint venture as well as the distribution of revenues and expenses.
A joint venture shares great similarity to partnership. However, there are still differences between these two types of business organization.
- Joint ventures are typically short-term partnerships between two or more individuals, groups, organizations or companies.
- Unlike partnerships which is a legal entity (where partners can essentially act on behalf of each other when conducting the business), a joint venture is merely an agreement between parties and pool resources. Participants are legally bound and therefore cannot act on behalf of each other.
- A joint venture agreement is usually very flexible. There are a number of ways to address and accommodate the needs of the participants.
- A joint venture is usually not permanent, but is renewable every few years.
- In terms of liability, partners in a partnership are jointly liable for all debts of the partnership, whereas participants in a joint venture are only responsible for issues related directly to the project.
Overall, both partnership agreement and joint venture agreement are relatively complex legal documents that require careful consideration.
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