5 Reasons why your business needs a Partnership Agreement
A partnership arises when two or more individuals, or commercial entities, operate a business together. Generally, a partnership can have up to twenty general partners, with some exceptions listed in the Corporations Regulations 2001. Due to the complexities involved with having more than one person run a business, it is highly recommended that a partnership agreement is executed during the formation of a partnership.
What is a partnership agreement?
A partnership agreement is an important document which sets out the terms and conditions of the relationship between the partners. This agreement is not essential for a partnership to exist, but is helpful in outlining how income or losses will be distributed to the partners and how the business will be controlled.
It is not required for a partnership agreement to be in writing in order to be legally enforceable. However, it is recommended that you have a solicitor draft a written agreement in order to establish a clear understanding between partners on the terms and conditions.
What should be included in a Partnership Agreement?
A partnership agreement should outline who owns what percentage of a business. An example of this is when a majority partner takes on more responsibility in exchange for more of the profits. If the business is sold, this will also delineate who gets what.
Control and Decision-Making
A partnership agreement should also set out the process on how day-to-day management and long term decisions will be made. It should clearly identify what types of decisions require a unanimous vote by partners, and what decisions can be made by a single partner. This is crucial in preventing disputes in situations where there is no consensus between partners.
A partnership agreement should include non-competition and confidentiality provisions. This will prevent a partner from sharing confidential information with others or seeking employment with a competitor. This ensures that your business will maintain its competitive edge, thereby protecting the interests of all parties.
The division of profits should be considered in the partnership agreement. While all partners may hope to turn a profit, the profits may be used in a variety of ways. An example of this may include investing a set percentage of profits back into the business.
Death, Disability or Bankruptcy
A partnership agreement should also address what happens in the event of a partner’s death, disability or personal bankruptcy. This is particularly important as without a written agreement that addresses these situations, the remaining owners could be forced to dissolve the company.
Other things the Agreement may cover:
- Entry and Exit of partners;
- Initial and ongoing contributions of partners;
- Liability of each partner;
- The ability of partners to bind the partnership business; and
- Protection of minority owners in the event of a third party buyout.
Are you looking for a solicitor in Newcastle to assist you in your legal matter? Please don’t hesitate to contact Butlers Business and Law on (02) 4929 7002 or fill out an enquiry form on our website. We have experience in advising businesses in Newcastle, the Hunter and Sydney.