19 Jun Why is a written partnership agreement important for business partners?
You might get along with your business partner and never had any disputes. However, a partnership is not a separate legal entity and unlike a company, each partner becomes personally liable for any liabilities the partnership incurs. If you don’t have a written partnership agreement, you might want to consider one now.
What is a Partnership Agreement?
A partnership agreement is a contract between the partners in the business which outlines each partner’s obligations and responsibilities. The written agreement will also govern how important decisions are to be made, clarify the relationship between partners and layout the method to resolve disputes.
Without a partnership agreement, business partners must revert to the relevant legislation that applies in their state or territory such as NSW’s Partnership Act 1892 No 12. A well-drafted partnership agreement will ensure the partners are in control of how they run their business and avoid the hassle of interpreting complex legislation and case law so disagreements between the partners can be settled quickly.
Duties and responsibilities
Partners have duties to each other and duties to the business. A clause that sets out the obligations and rights concerning the partnership can ensure each partner is aware of their responsibilities especially for different aspects of the business. If one partner becomes sick or incapacitated or dies, outlining the process to transfer the rights in such a situation will reduce the risk of disputing who is the successor to deal with the business. It can also ensure how assets in the business partnership are transferred to the nominated beneficiaries.
Finances
Business partners may not have made equal financial contributions, so it is crucial to document the investment. A provision to specify how the partnership’s profits and losses should be managed and split amongst the partners whether it be in accordance with the split of financial contributions, or not, will help to avoid disagreements in the future.
Decision making
Besides setting out how decisions are to be made in the business partnership, the agreement should also detail what types of decisions partners can make. The different methods by which the decisions can be made include:
- Unanimous vote where all are in agreement;
- A majority of partners; or
- One appointed partner who decides on behalf of the partnership.
It is essential to outline any limitations or restrictions if a single partner is authorised to enter into agreements on behalf of the partnership or can bind the partnership to business decisions.
Dispute Resolution
When partners disagree about matters relating to the business, setting out a clear dispute resolution process will make it easier to resolve the issues. The process can also include a timeframe for the management of disputes to ensure negotiations are made in good faith and an outline for what to do if this process fails. This saves legal costs on expensive litigation.
Termination
A business partnership can come to an end in different ways. A termination clause can outline the process of how the partnership winds up, the ways a partner can exit the business and whether there is any right of first refusal granted to the existing partners to buy out the partnership. This clause also deals with what happens to the partnership assets and the responsibilities of the business partners.
Having a robust partnership agreement will help to ensure each partner understands their obligations and rights so the business can run smoothly. Do not wait and leave it too late if you don’t have a written partnership agreement in place.
Do you need to discuss your existing partnership agreement or create a new agreement? Contact Solari and Stock Miranda on 8525 2700, or click here to request an appointment with one of our Commercial Team.