What Is a Partnership Agreement?

Where two or more people work in business together and share in the business’s income or losses, they are acting in partnership. Unlike a company, a partnership is not a separate legal entity. This means that each partner is personally liable for the actions of other partners and any liabilities the partnership incurs. If you are operating a business in a partnership, you should have a partnership agreement in place. This article will outline what a partnership agreement is and the benefits of having this agreement in writing. 

What Is a Partnership Agreement?

Your partnership agreement is a contract between you and the other partners in your business and will outline each partner’s duties and responsibilities. These include duties to each other and duties to the business itself. A partnership agreement will govern important matters that arise in your business, including how to make decisions and resolve disputes amongst partners.

Once you have written your agreement, each partner must sign the document, making it legally binding and enforceable. 

Should My Partnership Agreement Be in Writing?

The law does not require you to have your partnership agreement is in writing. However, it is best practice to engage a lawyer to draft a document to govern your partnership. This is imperative if you have a specific vision for how your partnership will operate. A written agreement will clarify the relationship between the partners and what the nature of your business will be.

There are default provisions in each state and territory’s relevant legislation that apply when no written partnership agreement is in place. Therefore, drafting a written partnership agreement ensures this legislation does not control how you run your business.

Additionally, having a written agreement in place from the beginning reduces your risk of having partners disagree about the scope of your partnership. Furthermore, if things go sour down the track, a written partnership agreement ensures no confusion about specific terms that the partnership operates under. 

A well-drafted partnership agreement will also contain a disputes resolution clause, meaning there will be a process in place should disagreements arise. 

What Terms Should I Include in My Partnership Agreement?

Each partnership is different, and you can reflect these intricacies in your partnership agreement. However, some important terms will be present in each agreement. These are discussed below. 

Financial Contributions

This term will outline what each partner will be contributing financially. The typical scenario is for two partners to split the contributions 50/50, but this is not always the case. It is essential to include this provision to avoid disagreements in the future.

Profits and Losses

Similar to financial contributions, this term will specify how you should manage and split the partnership’s profits and losses amongst the partners. It is essential to consider whether you want this split profit and losses to align with the split of financial contributions, or if some other method should apply. 

Obligations and Rights

Sometimes all of the partners will have identical rights and obligations concerning the partnership. Still, there can also be times where each partner is responsible for different aspects of the business. Including an obligations clause ensures that each partner is aware of their responsibilities of the partnership.

Decision Making

This term will outline how you and other partners will make decisions in the partnership. It will outline the types of decisions partners may have to make. It will also detail whether these decisions must be made by:

• a majority of partners;
• unanimous vote; or 
• a single partner who can decide on behalf of the partnership. 

Additionally, it is essential to set out whether a partner can enter into agreements on behalf of the partnership, or bind the partnership to business decisions and agreements. If so, the agreement should detail whether there are any limits or restrictions on this authority.

Dispute Resolution

Sometimes the partners will disagree about matters relating to the business. That is why it is essential to include a disputes resolution process. Hence, the partners will have a clear process to follow, making it more likely they will resolve their differences amicably. It is also essential to include information about what to do should this process fail.

Exit

This term covers what will happen should one of the partners wish to depart and the process they must follow to do so. If this term is missing, the relevant partnership legislation will apply, and the partnership will automatically dissolve upon one of the partners giving notice that they intend on leaving. Including an exit provision in your partnership agreement overrides the legislation, enabling you to decide to continue the partnership with the remaining partners.

Term

This clause states how long the partnership agreement is to apply for. It can state that the agreement will last the life of the partnership itself, but the partners can also stipulate a shorter period. If this is the case, it is important to have another agreement drafted once the original one has expired.

Termination

When the partnerships are ready for their business to come to an end, they must have a process to wind the partnership up effectively. This clause should cover what is to happen to the partnership property (if any), and the responsibilities of each partner.

Key Takeaways

Having a partnership agreement in place is helpful for the smooth running of your partnership. It is especially essential should things go wrong down the track. Having an agreement in place ensures each partner understands their duties and responsibilities. It also sets out a dispute resolution process, which saves the partnership from wasting money on expensive litigation. If you would like more information on the partnership structure or assistance drafting your partnership agreement, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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