A Partnership Agreement is a contract between all partners in a business. It outlines each partner’s duties and responsibilities. It also sets out how the business operates and how partners resolve disputes.
Business partners often face issues when they do not clearly understand their roles. As a result, disputes can arise easily. For this reason, we strongly recommend having a Partnership Agreement in place.
Every business is different. Therefore, we recommend speaking with a lawyer. A lawyer can ensure your agreement covers all legal and practical requirements.
Legal definition of a partnership
A partnership exists when two or more people carry on a business together with the aim of making profit. This definition also includes incorporated limited partnerships.
There are three types of partnerships:
- General partnership
- Limited partnership
- Incorporated limited partnership
Advantages and disadvantages of a partnership
A partnership offers several advantages. For example:
- Partners share a common business vision
- Start-up costs are generally lower than a company structure
- Partners share skills, experience, and resources
- Partners share management duties and profits
However, partnerships also have disadvantages. For instance:
- A partnership has no separate legal identity
- Disputes can arise between partners
- Decision-making can take longer because all partners must agree
- Partners are jointly and individually liable for business debts
Why do we need a Partnership Agreement?
Disputes can arise in any business partnership. A Partnership Agreement helps prevent these issues. It clearly sets out how partners manage the business. It also defines roles, responsibilities, and decision-making processes.
What is included in a Partnership Agreement?
A Partnership Agreement can be verbal or written. However, we strongly recommend a written agreement signed by all partners. A contract lawyer can also help identify risks you may not have considered.
A written agreement helps reduce risk. In addition, it can save time, money, and stress.
We also recommend that each partner seeks independent legal advice.
A strong Partnership Agreement should include the following:
- How business decisions are made and how disputes are resolved
- How funds are contributed and used, including future financing
- How profits are shared, including whether any partner receives a salary
- What happens when a partner leaves the business
- Notice periods and exit terms for departing partners
- How debts and obligations are managed on exit
- Whether departing partners can start a competing business
- Disclosure requirements for outside business interests
These terms are usually discussed early in the partnership. At that stage, relationships are positive. This helps partners make fair and practical decisions.
Finally, each agreement should protect all partners. It should also minimise financial and operational disruption if someone leaves.
Key considerations
A Partnership Agreement helps partners understand their roles and responsibilities. It also reduces the risk of disputes.
Every business is unique. Therefore, agreements should always be tailored to each situation. We strongly recommend speaking with a lawyer to ensure your Partnership Agreement meets your needs.
If you or someone you know wants more information or needs help or advice, please contact us on (03) 9422 5439 or email [email protected].