Agreement of Association of Persons: All You Need to Know
An Agreement of Association of Persons (AOP) is a contractual arrangement between two or more people who come together to conduct a business venture. The agreement outlines the rights, duties, and responsibilities of each member of the association. In this article, we will delve deeper into the concept of AOP and what it entails.
What is an AOP?
An AOP is a legal agreement between individuals who join forces to carry out a specific endeavor. It is commonly used by businesses, particularly small and medium-sized ones, as a way to pool resources, share risks, and distribute profits or losses. An AOP is not a separate legal entity, and the members remain individually liable for their actions within the association.
Requirements for Forming an AOP
To form an AOP, there are certain pre-requisites that must be adhered to. These include:
1. Agreement: An agreement between two or more persons to carry on a business venture is essential for forming an AOP.
2. Objective: The objective or purpose of the AOP must be clearly defined in the agreement.
3. Contribution: Each member of the AOP must make a contribution towards the venture, whether in the form of money, property, expertise, or labor.
4. Sharing of Profit/Loss: The agreement must stipulate how profits and losses will be shared amongst the members.
Advantages of An AOP
There are several advantages to forming an AOP, such as:
1. Easy Formation: An AOP can be formed with minimal documentation and legal formalities.
2. Sharing of Risk: Members of an AOP share the risks and liabilities associated with the business venture.
3. Expertise: Members can bring in their unique skills, knowledge, and expertise, which can help the venture to grow and succeed.
4. Tax Advantage: An AOP is not treated as a separate legal entity; hence, the income is taxed in the hands of the members, which can lead to tax savings.
Disadvantages of An AOP
There are also a few disadvantages to consider before forming an AOP, such as:
1. Unlimited Liability: Each member of the AOP is personally liable for the debts and obligations of the association.
2. Lack of Stability: An AOP is not a separate legal entity; hence, it can be dissolved easily by the members.
3. Limited Scope: An AOP may not be suitable for businesses that require significant investment or have a long-term growth plan.
Conclusion
An Agreement of Association of Persons can be a suitable business structure for small and medium-sized businesses. However, it is essential to consider the advantages and disadvantages before forming an AOP. It is also advisable to seek legal guidance to ensure that the agreement is drafted correctly and all the legal formalities are adhered to.