A partnership is just one of many forms of business structure you can undertake as you start your new business. In business discussions, it is often easy to move forward and work together without a formal arrangement or agreement. Though this is not illegal, it can expose your business and you personally to risk. This article will explore what a partnership is, the kind of document you need to formalise your agreement and the advantages of having it.
What is a Partnership?
A partnership is a form of business structure where two or more people, or corporate entities, join to carry out business activities in common, with the view to profit. Partnerships involve sharing net profits and losses amongst the partners and, often, the financial contribution to the partnership. This often determines the partnership share. This structure is advantageous as it is quick, easy and cheap to set up, there is shared responsibility, and it is not as heavily regulated as other business structures.
However, the nature of the partnership involves a great deal of personal exposure. Since the partnership is not a separate legal entity in the same way as a company, it holds each partner personally liable for the actions of other partners. In the same way that profits are shared, losses are shared, and this comes from partners’ personal finances.
Due to this level of personal risk, having some kind of partnership agreement formalises the arrangement between partners. Additionally, it establishes responsibilities and helps avoid disputes down the track.
What is a Partnership Agreement?
The partnership agreement is a contract between you and the other partners in your business that outlines each partner’s duties and responsibilities. Each partner will have duties to each other and to the business itself. A partnership agreement governs the important everyday matters of business, how you will make decisions and what to do if there is a dispute between partners.
Continue reading this article below the formDoes the Agreement Need to Be in Writing?
Most contractual agreements do not have to be in writing. Verbal agreements are often considered at law equally binding. However, having a formal agreement is useful. It clarifies many important business matters and becomes an excellent reference point for all partners. Furthermore, it supports the relationship and nature of your business.
For example, it is much easier to have a formal agreement to refer to in a dispute. In contrast, a verbal agreement raises issues of establishing legality and clarifying the content. A written agreement will ideally clarify the scope of your partnership and the specific terms and personal responsibilities that the partnership operates under, which is often the source of many disputes.
Preparing a partnership agreement provides the opportunity for partners to discuss and document all the important aspects of their relationship, responsibilities and duties. It is best practice for each partner to engage a lawyer to draft the partnership agreement to ensure the terms are fair and equitable.
If there is no written agreement, each state and territory has legislation that implements default provisions. Whilst these default provisions are not necessarily harmful, they may not align with your vision of how you intend to conduct business. A written agreement will ensure that your business arrangement legally aligns with your discussions and provides total clarity.
Key Terms of a Partnership Agreement
Each partnership agreement will be tailored to the kind of business arrangement you are undertaking. However, some key terms should be included in writing to capture and clarify information from verbal discussions. These terms are:
- financial contributions;
- obligations;
- decision-making; and
- dispute resolution.
Let us explore these in further detail below.
Financial Contributions
This term is essential to reflect the business arrangement and avoid disagreements. It will outline what the financial contributions of each partner will be. Though this is often a 50/50 split, this is not always the case and will need clarification.
Obligations
Each partner will have obligations concerning the partnership. Sometimes, these are identical, and sometimes each partner will be responsible for a specific business area. Including a clause that outlines each party’s obligations will ensure the business is carried on effectively and without confusion.
Decision-Making
Business regularly involves voting and making key decisions on the direction of your partnership. This clause will outline the types of decisions a partner can make and the circumstances under which they are acceptable.
Decisions can be made by:
- a majority of partners;
- unanimous vote; or
- a single partner who can decide on behalf of the partnership.
When you select what kind of decision-making you will allow, you clarify who has control over the direction of the partnership. If partners disagree over that direction, you can refer to this clause for clarification.
Dispute Resolution
Partners may disagree about the management or direction of the business. Including a clause on how to deal with disputes among partners is essential. You should include a provision for out-of-court resolution to avoid costly and stressful court proceedings. Having a clear process to follow is also likely to end in a more amicable resolution, as much of the stress of the dispute is removed. If this process fails, the clause should clearly outline the next steps.
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Key Takeaways
Like all contractual agreements, there is no strict requirement for writing a partnership agreement. However, you only stand to benefit from formalising your partnership in writing. It will provide clarity and equality between partners, reduce the likelihood of disputes and ensure your partnership and business run smoothly.
If you need help drafting your partnership agreement, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A partnership agreement is a contract between you and the other partners in your business that outlines each partner’s duties and responsibilities.
Several other key terms may provide important information for your agreement. These terms include profits and losses. Additionally, you may add a termination clause detailing how to terminate the partnership or how to proceed where only one partner wishes to leave. Furthermore, you may consider adding terms addressing whether partners are allowed to enter into alternative agreements that will bind the other partners.
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