Why you should have a Partnership Agreement

July 9, 2019

A business partnership can be fun. Being asked to join a partnership could be the recognition that you have worked so long to achieve. Starting a new partnership with your colleagues, could be just the challenge that you need. You will be thinking about refining and executing the business plan.

There are also things that are not very much fun – writing a partnership agreement, for example.

A partnership agreement is the legal document which defines each partners’ rights and responsibilities, as well as provisions for running the business, both day to day and in the event that a partner dies or the partnership dissolves.

It is one of the most important things you can do before you start investing time and money in the business. It is a really, really good idea to do it.

Get legal advice for your business

If you need to speak to a commercial law expert now, make a quick enquiry below and we will get back to you ASAP. 

You may have a partnership agreement already if you are joining a partnership, or you may be writing one for a new partnership, but there are some key provisions that you should discuss with your lawyer. If nothing else you will want your lawyer to advise on these:

  • Decision making. You should talk about and decide how the partnership makes decisions. You will want to think about what are important topics. In many cases, you will want major decisions to be unanimous, so that any partner has the power of veto. In others, you might want decisions to be made by a majority.
  • Capital contribution. The agreement should be clear on how much money each partner is putting in. You should also address what will happen if the initial influx of money is not enough to carry the partnership through to profit. What will happen if the business needs more money? Will the partnership seek outside investment or will the partners put in more money themselves? Also, if one partner is the ‘money’ partner and another is the workhorse, it is good to make this clear on paper so that everyone understands what they are getting into.
  • Salaries/distributions. When will the partner be able to take money out of the business? If one of the partners wants to build a large business, this may require keeping the money in the partnership longer (and thus fewer distributions). Will partners ever get re-paid for the investments they have put in, if so when? You and your partners should be in agreement about the ways the money should be allocated among the partners.
  • Death/disability. Bad things can happen, and it is best to be prepared. You should think through who in your life you trust to make decisions on your behalf, who will inherit your share of the business; and will you want your beneficiaries to have a say in the business (or, conversely, are you prepared to share power with your partner’s spouse or relative).
  • Dissolution. No-one ever wants to talk about this one, but it is extremely important to discuss this at the beginning of the business relationship. Decide now, whilst everyone is getting along. What will happen if one of the partners does not want to be involved anymore? Think ahead to a time when you and your partner(s) may not be in agreement, which will not be the time to start arguing about the exit strategies. The time to agree exit strategies is at the beginning when everyone is working to make the business take shape.

Are you thinking about a Partnership Agreement? Contact us here.

Related Contracts Content

Green Socks Clause - How to expel a partner from an agreement.