Starting your own business can be an exciting time. Perhaps you have decided to undertake this venture as a sole trader, or in partnership with somebody else. If you decided that starting your business as a partnership best suits your business needs, you should strongly consider a Partnership Agreement.
At the formation stage of your partnership, and shortly after countless discussions and planning sessions, you undoubtedly formed the view that you and your incoming business partner have a shared vision for your business. You are both on the same page. Should any unexpected obstacles arise, you will both be able to deal with them sensibly and amicably.
But What if You’re Wrong?
Drafting a formal Partnership Agreement from the outset will not only set out each partner’s legal obligations to each other and the business, but it can also prove invaluable in the event one partner wants to exit the partnership.
What is the Relevant Law?
Each state has separate legislation that governs the operation of Partnerships. For example, in NSW the Partnerships Act 1892 (‘the Act’) applies. Among other things, the Act:
- sets out the relationship between the partners,
- gives power to each partner to bind the partnership, and
- gives power to each partner to dissolve the partnership.
Consider Sam and Sasha – a newly formed business partnership. Their business is wedding planning. Sasha decides to enter into a lavish contract with a third party equipment hire company. The company will provide smoke machines, ice sculptures and DJs. Sam is horrified as neither are in a financial position to afford this contract. Sasha’s actions, however, will bind the partnership. Similarly, Sasha continues his spending spree and buys sample wedding couture and Swarovski crystal wedding favours. These expenses belong to the Partnership, and Sam and Sasha’s personal assets will be available to satisfy any partnership debts.
The Act is not the only source governing partnerships. Depending on the nature of the partnership, other areas of law may apply. These include consumer law, contract law, the law of fiduciaries and the common law (judge-made law).
What is a Partnership Agreement and What Does it Cover?
A partnership agreement is a formal contract. It governs the partners relationship to each other and to the business. Typically, it is in the form of a deed. As a guide, partnership agreement’s cover:
- initial and ongoing contributions of partners,
- liability of each partner,
- what will occur in the event of one partner exiting (including as a result of death or incapacity),
- the ability of partners to bind the partnership business, and
- how the income or benefit of the partnership will be paid out the partners.
It is important that your Partnership Agreement is properly drafted and addresses all of the standard provisions, as well as those unique to your business or industry.
Drafting a Partnership Agreement is unlikely to be the most initially rewarding aspect of establishing your partnership business. Having a formal Agreement in place, however, provides a framework for the partnership’s smooth operation, and could prevent many headaches down the track.
If you have any questions about partnerships, or business structures generally, please give us a call on 1300 544 755. One of our experienced business lawyers would be delighted to assist you.