A Partnership Agreement is a contract between all of the partners in a business which outlines each partner’s duties and responsibilities, governs important matters that arise from the business, and details processes for making business decisions and for resolving disputes that may arise between partners.
The relationship between business partners can deteriorate if they do not understand their duties, roles and obligations. A Partnership Agreement should be considered an essential for anyone operating businesses in partnership.
Legal definition of a partnership
A partnership is described as a relationship which exists between people carrying on a business, with a common view of making a profit. It also includes incorporated limited partnerships.
There are three typical different types of partnerships;
- Normal partnership;
- Limited partnership;
- Incorporated limited partnership.
Advantages and disadvantages of a partnership
There are numerous advantages of a partnership:
- Sharing the same vision of success in a business enterprise.
- The costs involved in setting up and continuing a partnership are generally cheaper than creating a company.
- Sharing of skills, experience, equipment and financial resources.
- Partners have equal responsibility in the management of the business and likewise share net profits equally.
However, some disadvantages of a partnership include:
- A partnership has no independent legal status.
- There is potential for conflict between business partners.
- It takes more time to make business decisions because all partners need to be consulted first.
- Partners are jointly and severally liable for the actions of each of the partners, meaning that in addition to having a proportionate shared liability for all of the debts of the partnership, they are also each individually personally liable for the whole of all debts incurred by or in the name of the partnership.
Why do we need a Partnership Agreement?
As outlined above, there will always be potential for disputes between partners about the management of their business. A Partnership Agreement can address all issues involved in running a business and clarify the roles and responsibilities of all partners.
What is included in a Partnership Agreement?
A Partnership Agreement can be verbal or written, however, we highly recommended your Partnership Agreement is reduced to writing and signed by all partners. We can help you to consider various circumstances and scenarios that could arise and can be regulated with proper considered processes.
A comprehensive Partnership Agreement is vital for risk management and could potentially save business partners time, money and stress. We also recommend that each partner seek independent legal advice regarding the terms of the Partnership Agreement.
There are many factors that need to be considered when a Partnership Agreement is being drafted. It is always best to ensure that your Partnership Agreement is tailored to your business needs. Here are a few factors that should be included in a Partnership Agreement:
- How partnership decisions are to be made and what procedure should be followed if there are any disagreements.
- Details of how funds for the business will be used; how much each partner will contribute to starting the business and how the partnership will acquire more funds for business operations/expansion.
- Distribution of profits between partners. For example, if one partner does more work than another, will they be paid more? A Partnership Agreement can include a clause that allows one or more partners be paid a salary in addition to a share of profits.
- Procedures for a partner who wants to leave the partnership. For example, how much notice must a partner provide the other partner’s of their intention to leave the partnership?, How are outstanding debts to be paid? What rights, if any, will departing partners have if they propose to start a similar business? Discussing these matters from the outset when partners or intended partners are motivated and usually on good terms (prior to any business disputes) is most likely to lead to better negotiations and outcomes.
- What if a partner dies or is incapacitated?
What are the procedures if we have all had enough and simply want to wind up the partnership?
The above list of things to be included in a partnership agreement is by no means exhaustive. Other issues may need to be considered depending upon the nature of your business and the industry in which your business operates.
A Partnership Agreement helps business partners understand their duties, roles and obligations and reduces the potential for disputes between partners about the management of their business. Disputes are still inevitable. A comprehensive Partnership Agreement can also help to regulate the relevant processes in the event of a dispute, so as to ensure that a business has a better chance of remaining viable. A comprehensive Partnership Agreement is vital for reducing risks and can save businesses and partners cost and future stress.
Relationships between partners of a business are unique, as are businesses, so to avoid disputes and complications, we strongly recommend you speak to a lawyer who can help to ensure you have covered all the necessary requirements in your Partnership Agreement.
If you or someone you know wants more information or needs help or advice, please contact us on (08) 8344 6422 or email [email protected].