Partnership Agreements: Clauses and Stipulations

Before entering a partnership agreement, people should be completely clear and honest about their intentions and expectations.

If one or more of the partners feel that they require certain assurances before they will invest into a business, they can ask that certain stipulations be included in the partnership agreement.

These clauses unmistakably define the legal obligations of the partners and managers of the company, and alert any potential partners to any and all of the possible actions an associate may legally take under the terms of the agreement.

Partnership Agreement Clauses

Despite the amount of time and care spent on a contract, no agreement is completely bulletproof. There is always a chance that a contract, stipulation, or clause will be challenged in court and found to be illegal or unenforceable under the law.

Yet, individuals always stand a better chance of protecting their interests by insisting on specific clauses.

Whenever partners enter into a heated disagreement, the original partnership agreement, contract or company charter becomes the guideline and yardstick for any potential solutions.

Without these strict guidelines, vague or non-existent language in an agreement leaves critical issues up to interpretation or majority rule.

Expiration Dates

Some partnerships are short-term agreements.

These types of contracts can include an agreement to maintain the partnership until a specific project is completed, or limits the existence of the company to a specific amount of time.

Scenarios for this type of agreement include seasonal work, or outsourced or subcontracted contracts to complete a specific project.

These arrangements benefit everyone, as there is no room for disagreement. Once the job is complete, there is an amicable dissolution of the company and the immediate distribution of assets or profits between the partners.

Be aware of your obligations

A person should never enter into any type of agreement without considering the obligations they are making to the company and the other partners.

Indeed, legal contracts bind parties together in ways they might not expect and an inflexible contract puts a person at risk.

Such risk can include the inability to sell their portion of the business or the inability to force the dissolution of the company in cases of illegal, immoral, or unethical actions by the other partners or the company.

These ties can be especially costly if the company ends up insolvent or is involved in a legal dispute.

Individuals need to understand their obligations and commitment to the company before they agree to invest.

Forfeit Clauses

Sometimes companies try to cripple competitors or avoid a costly buyout by enticing certain critical partners to jump ship.

Partners will write in a clause that forces a forfeiture of the partner’s financial and intellectual interests in the company if they try to leave.

Buyout Clauses

Sometimes the only long-term goal for partners is to build up the company so that it is an attractive object for a buyout by a larger company.

These clauses spell out the requirements of a potential sale of the company. Usually, focusing on the minimal amount of time the company has to become profitable or the cash amount investors would accept to sell the company outright.

Many venture capitalists sit on unprofitable investments with the expectation that the company will become an IPO when it is most profitable. Therefore, guaranteeing them a sizable return on their investment.

In the creation of any agreement or legal contract, it is the duty of everyone involved to be forthright and honest about his or her expectations. While it might result in a delay or cancellation of any plans, a thorough wording of a contract limits disagreements between partners and results in a stronger company with an increased focus on its goals.