Do We Need a Partnership Agreement?

Starting out on a new business venture with others you know and trust is normally about planning all things you will do to make your business a success. It will very likely involve a range of issues focussing on finances, how to promote and sell the product or service and providing excellent service.

However, for most business ventures there will come a time when relying on ‘what was said during the early days’ is not going to work out. So what happens if things are going wrong in the business or someone wants to leave and sell their share of the business? How will you deal with it if you are having a problem agreeing between yourselves?

In the absence of a Partnership Agreement (“PA”) The Partnership Act 1890 provides the legal rules that govern a partnership. Importantly, it provides that all partners are entitled to share the profits equally no matter how much money, capital, effort or skill they have put into the business and any partner can bring end the partnership by simply giving notice to all the other partners. Also, if one of the partners dies the partnership is automatically dissolved.

With a Partnership Agreement in place there is an agreed written structure for your business, which can spell out each partner’s responsibilities, rights, profit/liability sharing, how to go about entering and leaving the business and also the terms on which disputes are resolved.

Typically they cover the duties and responsibilities of each partner, the management of the business, salaries, allocation of profits, borrowings and reimbursement, non-competition, powers of attorney, admission of new partners, leaving or retiring from the partnership, termination and the dispute resolution arrangements.

Having a Partnership Agreement is definitely not to be seen as a negative thing like planning how you divorce while getting engaged. It is a practical and entirely prudent way of ensuring that the business has proper foundations to deal with a range of fundamental issues that will very likely come up at some time or other.

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