Creating a partnership can be a good way to start a business because it helps the business to benefit from diverse experiences and skills. However, there are times when partnerships suffer due to some legal mistakes made at the time of creating a partnership.
1. Taking On Too Many Partners
The first legal mistake that people make, according to legal firm Basalt Legal, is taking on more partners than the business needs. It is important to remember that the point of creating a partnership is to pool the skills, resources, and expertise necessary to carry out the business. It is not a favor or a means of rewarding someone.
People often make the mistake of adding a partner to the business when such person adds no strategic value to the business. This creates the risk of allocating responsibilities fairly among partners and ensuring that each partner bears a proportionate amount of risk. Therefore, stop to think whether the business really needs a new partner or whether hiring a person to do the job will suffice.
3. Not Specifying The Profit Sharing Ratio
The second problem stems from partners not being diligent enough to specify the share of capital contribution, risk allocation, and profit or loss distribution. Basalt Legal explain that legally, the partners are free to determine among themselves the ratio in which profit or loss is to be distributed among themselves, which does not always have to match the ratio in which each partner contributes capital.
Few partners realize this and assume that profit/loss is to be distributed either equally or in the same proportion as capital. This creates disputes at the time of profit distribution and a lot of unnecessary bad blood. The sensible thing is to put the profit and loss sharing ratio in writing in the partnership deed.
4. Not Signing A Non-Compete Clause
The third mistake is failing to sign a non-compete agreements. Partners may enter and leave the partnership at any time, taking away valuable information about business assets, processes, important clients and trade secrets. A non-compete agreement prevents outgoing partners from using this information to set up a competing business that could damage the interests of the partnership business.
Thus, it is good business sense to include a non-compete clause in the partnership deed under which no partner may carry out a competing business one or two years after leaving the partnership. However, in certain places non-compete clauses are not legal.
5. Inappropriate Bookkeeping
The next problem relates to maintaining accounts and filing taxes. Bookkeeping for a partnership is markedly different from maintaining accounts for a sole proprietorship or a corporation. Due to the small scale of operations, many partnerships underestimate the importance of proper bookkeeping in line with internationally accepted accounting standards.
This creates the risk of audit issues and inaccurate tax returns. To avoid all of this, a simple step to take is hire a competent tax accountant from Basalt Legal or a bookkeeper who is familiar with the accounting standards for partnership businesses. It will help your business in the long run since you won’t have to incur heavy litigation expenses or tax penalties.
6. Not Taking Legal Advice
Not getting legal advice is another mistake that people commonly make when setting up a partnership. A lawyer from a good firm such as Basalt Legal does not cost much but can help you avoid some very expensive troubles in the long run. A lawyer can advise you about how to go about your business without creating legal problems for yourself or any of your partners.
The lawyer can also help with the preparation of the partnership deed and other instruments necessary for legal recognition of your business as a partnership. Doing all of this ensures that your business gets all the legal protection that it should get under the law.
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