Why Do Partnership Agreements Exist

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In principle, a partnership agreement is reached to deal with all kinds of situations where there may be confusion, disagreement or change. That is why any partnership should have an agreement from the outset: a written partnership contract should include provisions that protect minority partners. Such a clause, the «tag along» provision, protects minority owners in the event of a third-party purchase. If a majority shareholder sells its shares to third parties, the minority shareholder has the right to be part of the transaction and to sell its shares on similar terms. The advantage for the minority owner is that he can avoid being in business with an unwanted new co-owner. This provision also ensures that all partners receive similar takeover offers and protects minority owners from the adoption of much less attractive offers. One of the main practical reasons why a partnership contract should be written is that a partnership agreement aims to prevent internal legal problems and differences of opinion by clearly specifying the role of each partner and the activity. In addition, creating a partnership is simple and offers each partner the benefits of working with larger amounts of capital, experience and other resources. A partnership agreement is a document that can be used in addition to the legal forms of the state necessary to create a partnership, although it is not necessary. If the business does not grow as quickly as expected and these high returns are not realized, this partner may be tempted to stop working for the company or, worse, to work for a competitor. In this case, the other owners will want to remove this partner who no longer participates but who still owns a share of the business.

A partnership agreement should include a procedure for withdrawing such a non-compliant or non-compliant partner and recovering its interests before its action (or inaction) endangers the company. Shared responsibility can be problematic in a partnership without agreement. In the absence of another agreement, a partner can enter into a risky contract, and if that contract fails, that partner and all other partners are also responsible for that debt. A bad decision by a partner may go bankrupt if other partners who did not participate at all go bankrupt. A partnership agreement can be developed to avoid such incidents. A written partnership agreement providing for the sustainability of the partnership between the surviving partner and the estate of the deceased partner can avoid this problem and create tax benefits for surviving partners. A written partnership agreement may include a clause allowing one or more partners to obtain a «salary.» This can be tax-efficient because it creates flexibility in the distribution of partnership benefits. For example, if a partner works in another paid job, an additive of 50% of his or her income could be paid into a higher tax bracket. With a pay clause in a written social contract, the partner who works more in the company could benefit from a greater share of the profit through the payment of a salary, which would keep all tax costs at a lower rate.

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