I found my partner co-founder and my angel investor. What’s next then? Should I draft a shareholder agreement? Or partnership agreement? What are the contractual aspects of business partnership I must take into consideration? How should I tackle legal aspects that have a bearing on partnership rules in business? I am not the one to face such a volley of questions. It comes to any businessman consider getting a business partner.
Investors have replaced banks as the financial engine of the new economic order. With the UAE fast becoming the pivot of economic progress, investors focused on the Middle East and North Africa (MENA) are looking for opportunities in the country. With investors scouting for joint ventures, you, as an entrepreneur, may love to have a partner who can complement your skills or help enlarge your clientele.
A business partnership creates a sense of excitement at the onset. But it has the potential to end tumultuously. You must be cautious in the beginning to follow certain important legal aspects of business so as to prevent turbulence later. Get a business partnership agreement written in a way that spells out rights and responsibilities and other contractual aspects leaving no room for confusion or acrimony.
So, what contractual aspects of business partnership you must pay attention to? Here are some legal ins and outs that you cannot afford to miss, especially when you are about to partner a UAE or a non-UAE investor.
Get It Written And Make It Legal
Business partnership rules to become smooth and devoid of any risk should be written and registered as a legal document. Clarity is the key to make a relationship successful. The document should clearly confirm the rights and obligations of each leaving no room for confusion. Make sure it also covers dispute resolution mechanism, all major issues, and a way to exit in case of disagreement. Get every sentence checked by a legal expert to ensure there is no differential interpretation. Keep the writing style simple and easy to understand. Identify your partner clearly on the document. Register the document with signs from business partners and witnesses.
Fixing The Ownership
Fixing the ownership percentage is the most important of all contractual aspects of business partnership. It must address the following.
- Who owns how much stake?
- What happens when ownership undergoes changes?
- Who is to get what if one partner makes an exit?
- Can a partner sell his stake outside?
- Is there any option for one partner to buy another’s take?
- What happens in case of the death or insolvency of a partner?
- What way can the existing partner take on the new ones?
While drawing the ownership lines, it is important to explicitly mention if any partner has the right to bind or forge a contract without consent from the other. This allows you to stay in control and avoid any unnecessary burden because of your partner’s reckless business actions.
You have taken first strides. But when you have a business partner, legal aspects require you to allocate him a stake in your venture turning it into a joint effort. The written agreement must delineate who owns what percent of stakes and how much his contribution is. It should also clarify financial, time, effort, skills, and material contributions incumbent upon each.
Any contribution is fixed based on the ownership percentage. But don’t adopt it as a fixed formula. Make sure that who has cash in hand can make more monetary contribution and those without can pitch in the sweat equity.
Define Distributions, Allocations
You cannot have sleeping partners in the UAE. They must be active and you also need them contributing to the venture. The contractual aspects of business partnership must explicitly mention the distribution of duties – who should do what type of work. It should also clarify the distribution of finances – salary and profits. Make sure to detail who has what type of authority, voting rights, and operational freedom.
The legal aspects of business partnership must also cover the payment obligations and allocations of profit and loss. Who can take draws and who cannot? Lay down the formula for the distribution of profits and losses, the timing payments, and the method to pay (lump sum or in installments).
This can cause much acrimony if you fail to give due consideration when finalizing contractual aspects of business partnership. And it has the potential to cause both your partnership and business to fail. Never expect your partner to agree to your decisions wholeheartedly. So, find out a mechanism for decision making and lay down it explicitly.
Be mindful of a few things, such as
- How to make decisions
- Who has the final say
- Who is responsible for day-to-day management decisions
- How to make long-term decisions
- Which decisions need unanimous or majority voice
- To what extent a partner can make a decision
Resolving Disagreements, Disputes
Be prepared to work through partnership disagreements and disputes. It can be smooth only when a dispute resolution mechanism is part of your contractual aspects of business partnership. Explore legal options and include them in order to make sure disputes will not be too many and turn ugly enough to derail your enterprise.
Define the process of the resolution of disputes in stark and pervasive terms along with other legal aspects of business partnership. Make a mention if mediation can resolve the differences or you can seek arbitration. Explain the procedure – when and how – of resolving conflicts.
It is exciting to forge a partnership, but this should not let you down your guard. A business partnership is a union of goals, not the merging of personalities or minds. There is the likelihood of disagreements and even clashes down the line. In such a scenario, the brand that you have painfully inculcated as a symbol of your business prodigy may suffer and with it, all your dreams, hard work, and resources put into the venture.
So, focus on protecting your brand while inking business partnership agreement and finalizing contractual aspects.
Include Clauses To Protect Yourself
Your business is your brainchild. You have invested time, money, thoughts, and emotions into it. Don’t allow partnership turmoil to ruin yourself. Ensure the legal aspects of business partnership include ample measures to protect your personal assets. A troubled partner cannot force liabilities on assets owned by you and your family. You may even extend it to rescue you from liabilities arising out of your partners’ misdeeds – he leaves midway, steals your customer, starts a new venture, or engages himself in any unlawful activity.
Make Way for Exit Strategy
It is better to exit than stuck in disagreement and hinder the business growth. When forming contractual aspects of business partnership, make provisions for the exit too. You cannot think of separation from the day one but must have a plan in place to deal with it if arises. Define rules of business partnership along with how to fix partner’s portions and divide business assets, the brand, and liabilities in case of one seeking to exit.
Partnership Agreement Dissolution
You can not guarantee that a partner stays true to his commitment as defined in contractual aspects of business partnership. There may arise circumstances when you feel the need to seek a termination. So, make sure you have a legal provision to allow such a thing subject to certain conditions. Spell out the circumstances, such as delay, violation of terms, and bankruptcy, when such an action is feasible. This specifically needs to be in sync with the laws of the place where your business is registered.
Pay Attention to Critical Developments
- Include clauses prohibiting your partner from stealing your intellectual property rights or customers and making a competitor firm when he makes an exit.
- Have provisions to deal with when your partner becomes sick, met with an accident, turns disable, or dies.
- Ensure how to evaluate your business in case of a split.
- Mention situation when can lead to the modification of contractual aspects of business partnership.
- Add the confidential clause relating to your business practices.
- Fix personal and individual liabilities while defining business and debt obligations.
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