• Advice on getting into a business partnership


I am trying to invest in a business that already has 2 founders. I will become the third partner if I decide to invest. How can I make sure we are legally covered when it comes to our partnership agreement? What all should be included.

So far, we have talked about adding separation agreement, share of each partner and roles, responsibilities in the agreement. Should I be thinking of something else? Is there anything that I am missing which could be a potential loop hole for the future?

I also have nil to very minimal knowledge of this industry that the business is  in.

Any advice?
Asked 2 years ago in Business Law from United States
1. The Agreement should clearly mention the percentage of investment and sharing the profit accordingly,

2. It should mention the duties and responsibilities of all the partners,

3. It should mention about the authorised signatories for operating Bank Account,

4. It should also mention retirement/seperation terms and compensation to be paid to all or any retiring/separating partner/s,

5. It should have windup clause and how the assets and liabilities should be distributed amongst the existing partners in case of its winding up,

6. There are several such terms and clauses which can be added while drafting the Partnership Deed,

7. Engage a local lawyer to draft the said partnership deed for you. 
Krishna Kishore Ganguly
Advocate, Kolkata
19838 Answers
488 Consultations

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1. To be just and faithful to each other partner.
2. To render true accounts and full information of all things affecting the firm to any partner or his legal representative.
3. To indemnify the firm for any loss caused to it by any partner's fraud, or wilful neglect, in the conduct of the business of the firm.
4. Not to derive secret profits from any transaction of the firm or from the use of the property or business connection of the firm or the firm name, unless there is a contract to the contrary.
5. Not to carry on a competing business to that of the firm, unless there is an agreement to the contrary
Shashidhar S. Sastry
Advocate, Bangalore
1697 Answers
112 Consultations

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1) do not invest in any business without  consulting your lawyer 

2)amount of contribution to be made by each partner has to be specified 

3) mode of decision making has to be specified 

3) distribution of profits has to be specified 

4) clause in partnership deed regarding death / retirement of partner 

5) clause regarding dissolution of firm should be incorporated 

6) clause regarding resolution of disputes 
Ajay Sethi
Advocate, Mumbai
50958 Answers
3032 Consultations

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 A revised partnership deed is to be executed which can be made effective from retrospective effect, if cogent reason is provided in the deed and entitlement of share in the profit on prorata basis from the date the partner introduced his share of capital. The rights and duties of every partner flow from the partnership deed. So get the revised partnership deed vetted from your lawyer before you sign it.
Ashish Davessar
Advocate, Jaipur
24302 Answers
677 Consultations

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To ensure that your interests are fully protected, your agreement should have clauses pertaining to :

1) The Company and nature of its business, 
2) Initial Capital 
3)  Additional Capital Contributions, 
4) Expenses and Budgeting, 
5) Ownership of the Company, 
6) Tax Matters, 
7)  Distribution/ Partner/co-founder remuneration, 
8)  Management and Approval Rights
9)Partners/co-founders Duties to the Company, 
10) Project-Related Intellectual Property,
11) Confidentiality, 
12) Third-Party Offer to Invest,
13)Resignation and Removal of Founders, 
14) Dissolution and 
15)  Dispute Resolution

You need not be an expert in the industry that the business is already in. but our advise to you is that you should be having regular meetings with  the other partners at least once a fortnight to understand the status/ problems faced by other partners. 
Also when in doubt speak to your Lawyer or chartered accountant so that they can provide you with inputs on a timely basis. 

Rajgopalan Sripathi
Advocate, Hyderabad
1428 Answers
189 Consultations

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Partnership is an agreement between two or more persons (called partners) for sharing the profits of a business  carried on by all or any of them acting for all. Any change in the existing agreement amounts to reconstitution of  the partnership firm. This results in an end of the existing agreement and a new agreement comes into being  with a changed relationship among the members of the partnership firm and/or their composition. However, the  firm continues. The partners often resort to reconstitution of the firm in various ways such as admission of a new  partner, change in profit sharing ratio, retirement of a partner, death or insolvency of a partner.

According to the provisions of Partnership Act 1932 unless it is otherwise provided in the partnership deed a new  partner can be admitted only when the existing partners unanimously agree for it.

Depending upon the share of profits to be given to the new partner, either a sum of money will be directly paid by him to the old partners (through the firm or privately) or after recording new partner’s capital, new partner’s capital account will be debited with his share of goodwill, the credit being given to the old partners in the ratio of their sacrifice of future profits. The latter is an indirect method of payment for goodwill by the new partner. The payment is justified became the new partner will take a share of profits which comes out of the shares of other partners. The old partners must be compensated for such a loss.

According to Section 31 of Indian Partnership Act 1932 "A Partner can be admitted only
consent of all the Existing Partners."
Adjustments required when a New Partner is Admitted
a. Calculation of New Profit Sharing Ratio / Sacrificing Ratio.
b. Valuation and Treatment of Goodwill.
c. Revaluation of Assets and Liabilities.
d. Adjustment of accumulated Profits, Reserve and Losses.
e. Necessary Adjustment of Capital Accounts of Partners.
Change in Profit Sharing Ratio
A New Partner Acquires his share from the Old Partner in any of the following Manners;
(i) In their old Profit Selling Ratio
(ii) In a Particular Ratio or Surrendered Ratio
(iii) In a particular fraction from some of the partner 
T Kalaiselvan
Advocate, Vellore
41251 Answers
451 Consultations

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