A Partnership Agreement is a contract between all the partners in a business and outlines each partner’s duties and responsibilities, governs important matters that arise from the business, procedures for making business decisions and how to resolve disputes amongst partners.
The relationship between business partners can deteriorate if they do not understand their duties, roles and obligations. This is why we recommend a Partnership Agreement for individuals operating businesses in partnership.
All businesses and relationships between partners of a business are unique, so to avoid disputes and complications, we strongly recommend you speak to a lawyer who can ensure you have covered all the necessary requirements in your Partnership Agreement.
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 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.
- The costs involved in setting up 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, which means that as well as having a shared liability for all the debts of the partnership, they are also individually personally liable for 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 in writing and signed by all partners. Our contract lawyer can also advise you of any circumstances or scenarios that you may not have considered in relation to your business partners.
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.
- Procedures for a partner who wants to leave the partnership. For example, how much notice a partner needs to provide of their intention to leave, how outstanding debts will be paid, what rights, if any, will departing partners have if they want to start a similar business. These factors should be the first thing that is considered as at this point in time, partners are usually on good terms with each other and there are no business disputes. This allows for partners to be objective when discussing what will occur when one of them wants to leave the partnership. It is extremely important the plan put in place safeguards all the partners’ interests so that if and when a partner leaves, there is minimal financial burden on the remaining partners.
- All partners should clearly understand that if a partner is operating a separate business that may possibly compete with the partnership, they must keep all partners properly informed and may also be liable to share the profits of the other business with their business partners.
As is clear from the above discussion, there are various factors which should be included in a Partnership Agreement. The above list is not exhaustive, and we recommend you speak to one of our lawyers who can ensure that your Partnership Agreement is tailored to your business needs.
Conclusion
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. A comprehensive Partnership Agreement is vital for reducing risks and could potentially save businesses money and stress in the future.
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 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) 9381 5355 or email [email protected].