When a handshake isn’t enough: why you need a Partnership Agreement

If you start a business with one or more other people but do not want to form a limited company, a partnership arrangement will be legally recognized without the need for a formal contract. However, while a written partnership agreement is not required to form a partnership, it is a wise investment if you want to avoid uncertainty and the automatic application of potentially unsuitable statutory law.

What happens if we do not sign a Partnership Agreement?

The provisions of the 1890 Partnership Act will apply in the absence of a written agreement. In essence, these state that all partners are equal and equally share profits, losses, start-up and running costs, as well as workload. While the provisions are meant to provide an equitable framework for conducting business, there are significant implications. As an example,

– Regardless of how much capital, effort, or skill they bring to the business, all partners will be entitled to an equal share of the profits.

– Regardless of how much capital, effort, or skill they contribute to the business, all partners will be entitled to an equal share of the profits.

– Any partner can dissolve the partnership simply by giving notice to all the other partners, and the partnership will dissolve automatically if a partner dies.

– All partners will be held jointly and severally liable for the company’s liabilities. This means that if one partner makes a commitment and fails to deliver on it, you will be equally liable to correct the situation. If a debt cannot be paid, the creditor may pursue each of you individually, which means that one of you may be forced to pay the entire debt by yourself.

– If a partner becomes insolvent, his or her creditors may seize assets from the partnership to satisfy their debts.

– All partners will be considered “agents” of the company and will be able to act on behalf of the other partners. This means that an individual may enter into contractual and financial arrangements that are detrimental to the business, but they will be legally binding.

– Because all partners have an equal say in the business, making decisions can take time. Unresolved disputes may lead to the failure of the business.

What advantages will a Partnership Agreement provide?

A partnership agreement will provide a written structure for your business, clearly defining each partner’s responsibilities, rights, profit/liability sharing, business entry and exit rules, and the terms under which disputes are resolved, and the partnership can be terminated. It will ensure that you have a common vision for the business with mutually agreed-upon goals if it is carefully drafted. Most importantly, it will aid in the avoidance of costly misunderstandings and conflict.

The following are important topics to include in your partnership agreement:

a) ownership stakes, including any cash, assets, loans, or investments made by individual partners

b) Salary and compensation: how will profits and losses be distributed?

c)  how the collaboration will be managed

d) Each partner’s specific responsibilities within the company, as well as the level of performance expected of them

e) Whether partners are expected to devote their full time to the venture or are permitted to engage in other business activities.

f) What procedures should be followed if one of the partners wishes to leave the partnership, or if a new partner is admitted?

g) whether partners will be permitted to sell their stakes in the company to outsiders, and if so, how will their stake be valued.

h) On what grounds can a partner be kicked out of the partnership? (e.g. misconduct, non-performance of duties)

How do I set up a Partnership Agreement?

While many internet sites appear to offer seemingly low-cost pro forma partnership agreements, this can be a false economy for several reasons:

1) General partnerships, limited liability partnerships, and limited partnerships are the three types of partnerships. You must ensure that the appropriate vehicle is set up for your needs.

2) No two partnerships will have the same set of requirements;

3) You are unlikely to reach an amicable agreement without the assistance of an impartial third party advisor;

4) You cannot be certain that the agreement complies with partnership laws if you do not use a solicitor.

A better way to save money is to do some planning before hiring a lawyer: get together with your partners and make a list of the provisions you want to include in your partnership agreement. Your solicitor will then have a good starting point from which to clarify your needs and draft an appropriate agreement. However, because one lawyer cannot represent all partners’ interests, each partner must instruct their own solicitor to review the final document on their behalf.