March 28,2019:
Bhumesh Verma, is a Corporate Lawyer with over 2 decades of experience in advising domestic and international clients, with a place in “The A-List – India’s Top 100 Lawyers” by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters. A partnership entity is owned by two or more partners . If you decide to become partners, you need to set up a general partnership or a limited liability partnership which usually includes a formal partnership agreement signed by all partners (may or may not require a state filing).
This kind of business structure is quite simple and easy to operate and forming a partnership will enable you to raise money by selling partnership interests.
However, more often than not, there is a decent amount of confusion around partner roles, responsibilities and liabilities.
If the specific roles of different partners are not clearly demarcated, each partner can act on behalf of the partnership, take out loans and make business decisions that will affect and be binding on all the partners.
Partnerships come with a high volume of risks (even personal exposure in case of a general partnership) among business entities.
Therefore, you should, inter alia, consider the following factors before going ahead with a partnership:
- Each partner's respective investment: Which partners are investing cash and which partners are investing in kind? Are any partners bringing machinery, software or any other equipment required for the business, and does this part deserve consideration as part of the start-up investment or can easily be procured from alternative sources at minimal cost?
- Respective responsibilities and duties of each partner: Discuss each partner's specific role and responsibility clearly in the day-to-day operations of the business entity.
- Any restriction on partner’s interest in other competitive entities: Discuss whether all the partners will merge their interests in any competitive businesses in the proposed venture or continue to operate in competition ?
- Additional Capital contribution. Whether mandatory for all partners? how will the partnership ratio change if some partners contribute and some don’t?
- Exit options: On what terms will a partner be allowed to exit, particularly valuation of the outgoing partner’s share. There may be a discount on pricing if the exit is due to a default on part of the outgoing partner.
- Non-compete post exit: Whether an outgoing partner can engage in a competitive business? If not, how long in time or what geographical spread the restriction will apply?
- Transfer of partnership interest : Terms of transfer of a partner’s interest – right of first refusal to other partners or freely transferable to family members or third parties and so on, consent of other partners required for such transfer, etc..
Restrictions on pledging of a partner’s interest in a partnership for a loan, etc.
- Dispute Resolution process.
Only once you have clarity on the above aspects, you should get serious and contemplate a serious engagement / commitment further in terms of executing a partnership agreement.
This Article in a series on startup ecosystem and related issues. The Author, Bhumesh Verma has been assisted by Student Researchers team of Ishan Chauhan, Harshdeep Singh Bedi, Ankesh Kumar and Vanya Srikant.
