partnership agreement

 

 

Procedure for drafting for  partnership agreement 

Introduction

The partnership takes the form of a contract and is governed by the Partnership Act, 1932. The cosmetic companies seeking to scale up their economic capabilities and grow in the fast-growing and changing beauty market. The partnership collaboration is beneficial for the companies because the collaborations are 30 times cheaper than digital advertising as they already have an existing audience. The cosmetic company goes for partnership as they will have an advantage of cost-saving as well. For example- Katrina Kaif launched its cosmetic brand, Kay beauty on Nykaa, India’s largest beauty retailer.

Kay Beauty is a company of make-up products, it wants to launch its product in the market but it needs a platform to launch. Generally, Katrina Kaif will look for a prestigious platform which is famous among people. Therefore, she chose Nykaa, which is India’s biggest retailer and famous platform, having the availability of various other cosmetic brands. Hence, Kay Beauty has a great platform to launch its products having a wide range of customers. This is why cosmetic companies prefer to go for a partnership. The article discusses the procedure of drafting a partnership agreement along with why cosmetic companies go for a partnership agreement.

Partnership Agreement

A partnership agreement is an agreement between two or more persons who come together in a partnership and sign a contract to start a business together. The persons who enter the agreement are known as partners. The partnership agreement contains the details about the partnership and business such as profit and loss percentage, the relationship between the partners, etc. The agreement can be in writing or in oral and this has to be in accordance with the will of the partners.

It is not compulsory to register a partnership but it is always advisable to register the partnership and have a written agreement to avoid any future disputes. In the partnership, the relation of a partner is the most personal relationship because partners are like parents of the firm and business and they also spent most of the time working together to make the business successful. They grow the business together and take care of the same. 

Section 5 of the Indian Partnership Act, 1932 states that the relation between the partners results from the contract and the status. In the case of Hindu Undivided Family (HUF), the family members carrying on a family business or a Burmese Buddhist husband and wife carrying on a business as such, are not considered as partners in any such business. 

Use of Partnership Agreement in a Cosmetic Company

Initially in any business, the partners are motivated and happy to embark on the new adventure together. They agree almost on everything at the beginning. These new business partners think that they will stay in the business forever or until the company is wound up. They think nothing can go wrong and everything will be smooth. They also trust each other to a great extent. The partnership agreement plays an important role as it would state how the business should be managed, the rights and obligations of the partners and it also protects the investor’s interest. Therefore, there would be less chance of dispute, if there is a partnership agreement and especially in a written form.

Some of the reasons for the partnership agreement in a cosmetic company:

·         Having control over who owns the company– in a partnership agreement, there should be a reasonable restriction on sales and transfers of interests in a company to control its own business. If the interest is not specified in a written agreement then the owner can sell his interest to anyone else, including his competitor. If the parties do not address what happens upon the death or disability of an owner, the remaining owners could find themselves in business with the spouse or other relations of a disabled or deceased partner. If the agreement is properly drafted, the provisions of when, how, and to whom the interests may be sold or transferred in a company can be avoided. These provisions enable existing owners to retain their percentage stake within the company and protect them from unwelcomed partners. 

·         Approval on an important issue in advance– an agreement will allow partners to agree beforehand on important decisions, like dispute resolution. One of the most important provisions of a provision in their agreement needs mediation followed by binding arbitration. Without writing, there is no way to initiate mediation or arbitration of disputes and avoid costly and time-consuming litigation.

·         Removal of a Disruptive or Non-Performing partner– while the partners may form a corporation with the best of intentions. Over time, owners who were the best of friends or closest of the family members can grow apart, committing acts that endanger the business. A partnership agreement should include a process of removing such a non-performing or disruptive partner and reclaiming his interests before his actions jeopardize the corporation.

·         Protection of business and partner’s investment– an agreement should include provisions that address what happens within the event of an owner’s death, disability, or personal bankruptcy. Each of those events could have a negative impact on the company. Without an agreement that addresses these situations, owners might be forced to dissolve the company. Putting in danger the investments of all the partners. Provisions that address these scenarios can add predictability and stability when they are most needed. 

·         Confidentiality– the partnership agreement should include non-competition and confidentiality. The provisions that prevent a partner from sharing the company’s confidential information with anyone else or seeking employment with a competitor are key for a business to maintain a competitive edge and to safeguard the investments of the partners.

Procedure for Drafting Partnership Agreement

Association of two or more persons

In a partnership agreement, there must be a contract between two or more persons. This is the minimum requirement. Unless there are at least two persons, there cannot be a partnership agreement. The person entering into a partnership agreement must be competent to enter into a contract i.e., he must be a major and must be of sound mind. The person can be natural or artificial, or some natural or other artificial.

Agreement 

The partnership agreement can be oral or composed. The Partnership Act does not necessitate that the agreement must be in writing. However, when an agreement is in a composed structure, it is known as “Partnership Deed”.

Minimum capital requirement

At the beginning of the business, there is no minimum capital requirement. Partners can start the business with as much as minimum capital they want. The stamp duty calculation also depends on the amount of capital that has been put in by the partners.

Business

The motive of partnership is to have business otherwise there would not be any need for a partnership. It is not necessary that the business must have long chains and ventures. The business must be carried on in a particular way to make the partnership valid. 

Sharing of profits

The partners must have agreed to carry on a business and to share profits in common. The division of profits in a partnership is a prerequisite condition to constitute a partnership valid as a whole. In the case of Cox v Hickman, it was held that the sharing of profits is considered the most important test in determining the validity of a partnership. Sharing of profits also involves sharing of losses. However, sharing of profits is an essential condition in a partnership agreement, the sharing of losses is not.

Mutual agency

It is the foundation of a partner’s liability. In the meaning of partnership, it is the fifth component that gives that the business must be carried on by every one of the partners or by any one of them at least, representing all of them, i.e. there must be mutual agency among them. In this way, each partner represents both as agent and principal to one another. 

Important clauses in a partnership agreement

·         Names and address of the firm and its main business- it is one of the first things to be done. The name of the business and the address of the partnership firm and what the main business purpose is. In this case, the main purpose of the business is cosmetic products.

·         Names and addresses of all the partners- it is also an important thing to do. The names and addresses of the partners must be written to avoid any confusion. 

·         A contribution of the amount of capital by each partner- the capital amount contributed by each partner and what are their proportions.

·         The accounting period of the firm- the partnership shall be will and may be dissolved at any time with the consent of the partners. 

·         The date of commencement of partnership- the date of commencement of the partnership must be included in any partnership agreement. It states the date on which the partnership came into force.

·         Rules regarding an operation of Bank accounts- the bank accounts are opened in the name of the partnership. It is used for the lawful purpose of running the partnership business.

·         Profit and losses sharing ratio- the profit and loss sharing ratio is decided by the partners. It can either be equal or divided in 60:40 ratio. 

·         The rate of interest on capital, loan, drawings, etc.- as per section 40(b)(iv) of the Income Tax Act, 1961 or any other applicable provision, the rate of interest can be simple 12%.

·         Mode of appointment of an auditor, if any- this clause includes how an auditor must be appointed and the auditor must thoroughly analyze the partnership agreement. 

·         Salaries, commission, etc., if payable to any partner- if any partner is liable to be paid any salary or commission that must be stated in this clause.

·         The rights, duties, and liabilities of each partner- this clause includes all the rights, duties and liability of the partners in a partnership such as the partner shall be pay his debts punctually, be entitled to carry on business other than business or similar to that in his capacity and etc.

·         Treatment of loss arising out of the insolvency of one or more partners- if any one or more partners becomes insolvent then such partner shall have no right in any share in the profits and losses of the firm.

·         Settlement of accounts on the dissolution of the firm- this clause states about the dissolution of the partnership firm whether the firm will be dissolve at any time mutually or by giving a prior notice.

·         Settlement method of disputes among the partners- how the disputes are to be settled between the partners. For example- the disputes shall be settled by way of arbitration, and thereafter who will appoint the arbitrator and the nature of proceedings.

·         Rules to be followed in case of admission, retirement, the death of any partner- this clause states about what would be the rules if there is an admission of a new partner or death or retirement of an old partner. For example, in case of death, will the partnership continue to exist with the joining of the legal heir of the deceased partner or will the partnership continue with the remaining partners. 

·         Any other matter relating to the conduct of the business- all other matters relating to the conduct of the business will be mentioned in a separate clause.

Sample clauses in a partnership agreement of a cosmetic company

Let’s take the example of Kay Beauty and Nykaa for the drafting of clauses in a partnership agreement for a cosmetic company. There are several other clauses in an agreement, some of important clauses are in the following:

This Partnership agreement is entered into _________ (date) by and between Katrina Kaif (“First Partner”), and Falguni Nayar(“Second Partner”), at _________ (place).

Hereinafter collectively referred to as “Partners”.

Recitals

Recitals contain introductory statements in the agreement. It appears at the beginning of any agreement. It includes what the contract or agreement is for, who are the parties and etc. 

For example-

1.    First Partner is the founder and CEO of Kay Beauty and the Second Partner is the founder of cosmetic retailer, Nykaa. 

2.    The Partners have decided to enter into a partnership agreement for carrying on the business of cosmetic products.

Name

In the present case, name is not required since Kay Beauty was launched on Nykaa’s platform which was already an established platform and does not have a separate name. However, for any new business, this clause must contain the name under which the  partnership shall be carried on.

Term of partnership

The partnership shall be deemed to have commenced from _____ (date of execution) and shall continue unless otherwise determined by the Partners.

Capital contribution and interest rate

The capital amount _______ contributed by the Partners in the _____ proportions. The rate of interest shall be ______.

Profit-Sharing ratio

The capital amount contributed by the partners irrespective of that profits or losses of the partnership shall be divided and borne by the Partners equally.

Type of Products

The products shall be _______ which shall be cruelty free, vegan, paraben free and etc.

Remuneration

The Partners shall be entitled to get an amount of _________ as remuneration per month which shall be paid by the 7th day of the month.

Operation of bank accounts

The Partners shall operate jointly or by any one of them.

Goodwill

Since goodwill is the exclusive right of the firm, therefore, the partner who is retired or died or expelled shall not receive any amount for the goodwill. 

Insolvency

The First Partner or the Second Part whoever becomes insolvent shall cease to be a partner on and from the date of the insolvency of such partner. The amount which is due shall be paid to the Official Assignee in accordance with the provisions of this agreement.

Dissolution

If the partnership is expired during the lives of the Partners the partnership shall be wound up and assets shall be distributed as per the Indian Partnership Act, 1932.

Arbitration

·         Sole arbitrator or tribunal, as decided by the Partners.

·         The place of arbitration (name of the city). 

·         Law governing the arbitration.

·         Language.

Conclusion

A partnership is quite a common sort of business that is prevailing in the country. Cosmetic companies gain advantages by entering into a partnership agreement. It helps them to expand their business, collaborate with other huge, famous, and expensive brands. 

References

·         Partnership Act, 1932

·         https://legaldocs.co.in/partnership-deed

·         https://blog.ipleaders.in/nature-essentials-partnership-act/