An equity partnership agreement is a legal contract that outlines the rights and responsibilities of the equity partnership’s participants.
A partnership is a legal structure in which two or more people agree to combine their financial and personal resources for the purpose of starting a company. Each partner receives a share of the company’s revenues and losses.
An equity partnership agreement is a legally binding agreement between the members of a partnership that establishes the partners’ rights and duties as well as the percentage of their ownership in the firm. An equity partner owns a portion of the business and receives a portion of the partnership’s revenues. An equity partnership agreement should clearly out all of the partners’ rights and duties, including the equity partners.
Partnership Agreement Types
There are two kinds of partnership agreements:
In a general partnership, each partner is personally and collectively liable. In general partnerships, each partner is personally liable for his or her own responsibilities as well as the liabilities of the other partners in the firm.
Limited Liability Partnership: Each partner’s liability in this form of partnership is limited to the percentage of his or her participation in the firm. In addition, partners do not share the obligations of their colleagues.
A partnership agreement specifies whether the firm is a general or limited liability partnership.
System of Partnership in Lockstep
A lockstep partnership is a sort of equity partnership in which senior partners who have been with the company for a longer period of time earn a larger share of the company’s profits than new equity partners. The business community, on the other hand, is no longer a fan of the lockstep partnership arrangement.
According to critics, the structure discourages partners who want to make more money and lacks accountability. However, supporters of the system say that it protects partners from profits loss and decreases internal rivalry.
Partnership System of Eat-What-You-Kill
The second kind of equity partnership is the Eat-What-You-Kill Partnership System. In this structure, each partner receives a percentage of the company’s revenues, and people are compensated for their work in operating the firm.
Supporters of the Eat-What-You-Kill Partnership System believe that it gives partners greater control over their profits and consumers, as well as a clear grasp of what they need to do to meet their revenue goals.
The disadvantage of this approach is that it does not recognise non-billable time partners spend managing the partnership, which might lead to a lack of management. Furthermore, the structure hinders training of new or younger personnel.
The Fundamentals of a Written Equity Partnership Agreement
Each partner’s rights, duties, and obligations should be outlined in an equity partnership agreement. The contract should also specify how much of the company’s earnings each partner would get. Losses should also be allocated to future partners under partnership agreements.
Furthermore, the partnership agreement should specify how the company will make key operational choices. In addition to this, the partnership agreement should address how the firm would be dissolved in the case of a partner’s departure from the partnership or death.
Joint and several liability
Only the general partners of a limited partnership are personally accountable for the company’s debts and liabilities. If the firm goes bankrupt, the general partner’s assets might be utilised to pay off the partnership’s obligations. A general partnership, on the other hand, has joint and several responsibility for all of its members. If one of the partners is sued, all of the partners may be sued with that partner.
Ownership in Shares
Each partner’s equity ownership in the firm should be specified in the equity partnership agreement. Because equity ownership may be based on non-monetary contributions such as the contacts partners bring to the firm or real-life professional and managerial abilities, equity ownership does not have to be equal to each partner’s investment.
Sweat equity is a labour and effort investment in a company, organisation, or project. It is one method of increasing a company’s equity. Sweat equity may be used to provide equity for partners who do not have money to engage in a partnership. A Sweat Equity Agreement is worthless in and of itself. However, it adds value to the company via activities and effort.