A partnership is formed when two or more people go into business together. It establishes a business structure that is not a separate legal entity like a company, but instead holds each partner responsible for the actions of the others. In other words, the partners are personally liable for the actions (or inactions) of their partners, any losses or damages and any profits to the business. When starting a partnership, it’s a good idea to first speak with a contract lawyer, as contract lawyers are the most appropriate practitioners to draft these Partnership Agreements.
Should the Partnership Agreement be in writing?
While it is not required by law that Partnership Agreements be in writing to be enforceable, it is certainly recommended that you have one in writing. This is particularly important if you have expectations as to how the partnership will be managed and on what terms and conditions the Agreement will be based.
A Partnership Agreement should clearly set out the expectations, rights and obligations of each partner, and should be drafted by an experienced contract lawyer. Having a well-drafted Partnership Agreement from the outset will reduce the likelihood of disputes arising at a later stage. A good contract lawyer will also bring to your attention circumstances or scenarios that you may not have considered with your partners. In considering a variety of scenarios, you will be able to create a far more comprehensive Partnership Agreement, which is important for risk management and could potentially save you plenty of money and headaches.
What are the essential terms of a Partnership Agreement?
To ensure the greatest degree of protection for your business, you should speak with a contract lawyer about preparing a Partnership Agreement.
Some of the most important terms to be covered are:
- Financial Contributions – What financial contributions is each partner expected to make to the business?
- Profits and Losses – How will profits and losses be managed?
- Obligations/Rights – What are the rights and responsibilities of each of the partners? Will each partner be responsible for a particular area?
- Dispute Resolution – Have methods for resolving disputes been considered in the Agreement? Will the partners be required to go to mediation/arbitration before going to the courts?
- Termination – How can this partnership be terminated? What if only one partner wants to leave and the others want to stay?
- Other Agreements – Are partners allowed to enter into alternative agreements that will bind the other partners?
To ensure that the partners have entered into the Agreement on fair and equitable terms, each partner should be encouraged to seek independent legal advice before entering into the Partnership Agreement.
A Partnership Agreement is an important legal document, as it sets up the legal foundation for your business. Having a Partnership Agreement professionally drafted by a contract lawyer is recommended, as a good contract lawyer will be able to take into account your unique circumstances.