The decision to go into business is an important decision in itself – but the decision to ally yourself with a partner is a completely different one. If you are thinking about starting a business with a partner, you should structure your business as a limited liability partnership. Limited Liability Partnerships are one of the most common legal entities that grant ownership to two or more persons who share all assets, profits and liabilities. In a general partnership, it is important to understand that each person is responsible for the business and is liable for the actions of their partners. To avoid potential problems with your partners during the business, you should enter into a binding partnership contract before continuing any further. The partners should be prudent to enter into a binding partnership agreement only once the major criteria such as ownership, division of profit and loss, duration of partnership, decision making powers, voting percentage, dispute resolution mechanism, partner authority, and withdrawal or death of a partner are clearly defined in the agreement.
What are the main criteria to be included in a partnership agreement?
A partnership agreement can be tailor-made to include the main considerations both the partners would like to include. In the United Arab Emirates, a partnership agreement is constituted in the form of the ‘Memorandum and articles of association’, often commonly referred to as the MOU’s signed between the partners. This constitutes the by-laws that govern the partnership, whether it is a Limited liability partnership or other forms.
Partners Contributions and Ownership:
The partnership agreements should include the financial contributions made by each partner to the initial share capital of the partnership. In addition, it should include the share percentage structure, which represents the ownership of each partner in the shareholding of the company. It is crucial to note that voting rights are often dependent on the shareholding percentage.
Limitation of Liability:
The partnership structure, and particularly, the partnership agreement should list out the extent of liability for each partner. In limited liability companies, the extent of liability is clearly specified in the partnership agreement to be limited only to the extent of the shareholding of each capital and the personal assets of the partners are protected (Ref: Article 71 of the Federal Law no. 2 of 2015 on the commercial companies , ‘A Limited Liability Company is a company where the number of partners is at least two (2) but shall not exceed fifty (50). A partner shall be liable only to the extent of its share in the capital’.
Distribution of profits and losses:
A partnership agreement should also specify the share in profit and loss account for each partner. Partners may agree to share the winnings and losses in accordance with their ownership share. It can also allocate the measures in the instance the company runs into losses and that in turn falls below a median point that normal operations cannot be continued.
Audit Reports and approvals:
The partners should include the structure for compulsory annual auditing by a designated third-party auditor. Such measures ensure that proper compliance and checks and balances are maintained in the company.
Partner Authority:
The authority of each partner must be specified in the partnership agreement. The partnership agreement should explicitly state the authority of each partner to bind the company to debt or contractual agreements, which may expose the company to unnecessary risks. For example, whether each partner has the authority to sign and execute agreements which are binding on the company. Whether such authority will be exercised by the partners themselves or their nominated manager or board of directors. In such instances, what would be the limits to the powers assigned to them? Authority in terms of signing financial instruments, authority to appoint external auditors and to approve the audit reports, authority to appoint lawyers and to represent the company in litigation or arbitration should be specified.
Voting Rights:
The partners should address the structure for voting rights, whether the major decisions can be decided through a voting process and in such instance, what would be the voting rights assigned to each partner.
Withdrawal or death of a partner:
At the start of a partnership, the considerations extended towards either partner withdrawing from the partnership or the transition steps required in the instance of the untimely death of a partner are seldom discussed. It is crucial that these points are addressed in a partnership agreement and that a clear outline of the transition steps, including succession and first priority rights in case of share transfer are specified.
The partners should be prudent to enter into a binding partnership agreement only once the major criteria such as ownership, division of profit and loss, duration of partnership, decision making powers, voting percentage, dispute resolution mechanism, partner authority, and withdrawal or death of a partner are clearly defined in the agreement. It is also important to keep in mind that, although the partnership agreements can be tailor made as per the requirements of the parties, it should comply with the provisions of the UAE Federal Law no. 2 of 2015 on the commercial companies for its legal validity.
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