Partnership Archives - GUJRAT INDIA

The Cons of a 50/50 Equity Business Partnership

This article could have been titled “The Pros and Cons of a 50/50 Equity Partnership”, but the cons far outweigh the pros. When partnerships are formed, the obvious concerns are addressed. How do each partner’s skills-set and experience complement each other? How much will each partner contribute to get the business going? How long will they grow the business until they entertain selling it? Is that it? … hardly.

Once the business gets going no doubt economic and industry variables change which affect the business. Each partner’s perception of the direction the business should go changes as well. There are constant decisions with regards to the mixture of product and service offerings … the decision to get into another line of business or get out of one. Should the focus be on a higher volume, lower profit margin business model or vice versa? What about a shift to a more capital intensive model. If the business becomes a success, many times potential investors creep in, whether an angel investor or venture capitalist. Both partners need to agree on the investment proposal.

What if one of the partners acquires an asset for the business whether it’s land, a building, a small data center, a thousand servers, or to complicate things further contributes an intellectual asset of some sort. When the company is going to be sold, what is the value of the partner’s contributed asset? Who is supposed to value it? This can become an insurmountable hurdle. Most buyers know not to value any one piece near what it’s worth by itself.

When it’s time to sell the company, the financial situation of each partner has no doubt changed since the company was founded. The consideration for the company could be all cash, all stock or a combination of cash and stock. The tax implications of each of the three scenarios are different for each partner. I have seen the process of divesting a company go up in smoke too many times because the partners didn’t agree on the proposed deal. They spent years growing the business then totally disagree about when to sell, who to sell to, and/or how much to sell it for.

Business is about return on equity, not “all for one and one for all”. My suggestion … one ship, one captain.

Top Reasons to Use a Ready Law Firm Partnership Agreement Form

Starting a law firm can be quite daunting. You have to arrange the legal status of your entity. You also need to take care of office leases, taxes and other financial matters. More importantly, you need to establish the partnership and the management of the firm. A law partnership agreement is not easy to draw, so you should consider relying on a ready form. There are a number of benefits coming with this option. You should definitely consider all of them.

The first and foremost reason for using a ready law firm agreement form is greater protection. When all matters between the partners are arranged for clearly in advance, the risk of any disputes is automatically reduced. The chance of the firm being sued by former partners and clients is also lower. Generally, a ready form shows you all the details that you have to provide for, so you will not have to worry about leaving a loophole for any potential problems.

The ready form allows you to establish your partnership’s structure and management more accurately. Not many lawyers are familiar with the structuring of a company and its management, but these need to be provided for. Instead of using a business advisor, you can readily rely on a ready form to give you the template, while you simply fill in the blanks. This will ensure the quicker and smoother start of your business.

The wide range of customized forms is another reason why many law firms prefer ready partnership agreement templates. Many law firms do not fit the standard for partnership and want to make sure that their specific situation is reflected and fully explained in the establishment document. For instance, one of the partners might want to retire and start working of counsel at one point. Thus, a provision for this should be made in the agreement. Instead of drawing a special document, the firm can use a ready form customized for their case.

Convenience is another major reason for the use of ready law firm partnership forms. Having a template saves time that you can spend on more urgent matters. The ready form allows you to get the agreement signed easily and much more quickly. In this way, you can start your operations and make money faster, which is certainly an advantage. This makes the use of ready templates cost effective as well. Generally, it is always a good idea to leave the administrative work to professionals who specialize in this and to focus on your own work.

Overall, the ready forms for law firm partnership agreement allow you to secure the smooth establishment and operations of your entity. They are convenient to use and cost effective. They give you a quick head start in the business. Of course, you have to choose carefully the templates you use. It is essential for them to be drawn by professional lawyers who have long-term experience in this area of law. This will guarantee that the agreement is foolproof and useful.

Features of a Limited Liability Partnership

A foreign investor looking to set up business in India must consider multiple factors before deciding on what type of business entity to choose. Limited Liability Partnership (LLP) is gaining popularity with its numerous benefits it gives to the entrepreneur. LLP is a business entity which combines the limited liability of a company and the flexibility of a partnership.

LLP Registration in India requires that the LLP should operate in an industry where 100% FDI is allowed

We have listed down the features on a LLP which should help you make informed decision.

Partner’s Liability is Limited

One of the main reasons to register an LLP is limited liability. Limited liability means limited exposure to financial risk by investors of a company. Limited liability ensures the partner’s liability in the LLP is limited to the capital amount invested in the LLP.

For example, if Sam invested Rs 50,000 to start a LLP in India. The maximum liability he can have is Rs 50,000. In other words, his can potential loss cannot be beyond Rs 50,000. He won’t be liable for any liability beyond this initial Rs 50,000.

Another important feature of an LLP is that the act of one partner does not affect the other partner. For example of one partner borrowed some money in the name of the LLP without the knowledge of the other partner, the other partners cannot be held liable.

Transfer and Exits

LLP has perpetual succession meaning, the LLP can continue its existence irrespective of changes in partners. Partners may come and go but the LLP continues to be in existence. A partner of an LLP can resign and assign his profit sharing to another person and exit the LLP. Exit formalities can be completed by way of executing a simple supplementary agreement.

Legal Compliance

Limited companies need to hold board meeting 4 times a year, at least once in every quarter. It also needs to hold annual general meeting and maintain minutes for such meetings. LLPs do not have to adhere to such compliance unless and otherwise specified in the LLP Agreement.

LLP need not get its accounts audited unless its turnover exceeds Rs. 40 Lacs or the capital contribution is more than Rs 25 Lacs any financial year.

Income Tax

LLPs do not have Dividend Distribution Tax (DDT) whereas private limited companies in India are liable to pay DDT @ 16.609 % (inclusive of surcharge and education cess) on dividends paid to the shareholders.

The income tax rate for LLP is 30%. The profits shared by the partners after paying taxes is exempt from tax.

Let’s look at an example

Jack and Jill start a LLP with 50% profit sharing between them. In a financial year, the LLP had profit of Rs 10,00,000. The corporate tax is Rs 3,00,000 (30% of profit). The balance Rs 7,00,000 was shared between Jack (Rs 3,50,000) and Jill (Rs 3,50,000). Jack and Jill do not have to pay tax on their income.

Body Corporate

LLP and Private Limited companies are body corporate and a legal entity separate from its partners and shareholders. Limited Liability Partnership, similar to a private Limited company, is capable of entering into contracts and holding property in its own name.

LLP Agreement

LLP is organized and operates on the basis of an agreement. The LLP agreement will have the mutual rights, duties and obligations of the partner in relation to each other and other legally binding provisions.

Remuneration and Interest on capital

Partners are allowed to take remuneration as a working partner, provided the LLP agreement permits.

The partners of the LLP are also eligible to charge interest on the capital invested up to 12% p.a. The partners also can take interest on loan given to the LLP, provided the interest rates are within the limits specified in the income tax act.