5 Things To Look For in a Partnership Agreement
Thinking about entering into a business partnership? Find out why having a partnership agreement is important and 5 things to look out for.
A partnership agreement can be very lengthy and contain complex clauses. Often, it can be hard to pinpoint exactly what you need to include in your agreement. However, it’s important to make sure you cover all your bases. In this article, we’ll outline the 5 things you should look out for in your partnership agreement.
The purpose of a Partnership Agreement
A business partnership is one of the three main business types in Australia, with others being a sole trader and company. A partnership means you enter business with one or more people and divide all profits. A partnership needs to have its own Tax File Number (TFN) and Australian Business Number (ABN). Similar to a sole trader structure, partnerships are taxed based on each partner’s individual income. Furthermore, partners are responsible for the finances of the venture. This means that partners will be responsible for repaying any debts the business owes. The only way you can legally formalise the terms of your partnership is to have an agreement. This agreement should set out the terms of ownership, control and termination of the venture.
5 things to look for
1. Percentage of ownership
There should be a clear understanding of how much each partner is contributing toward the partnership, whether it’s a percentage of the inventory or percentage of initial investment. This will establish the amount each partner is contributing toward the partnership as well as determine what areas each partner is responsible for maintaining. This could be the case when one partner decides to be more hands on with the business, and the other only decides to invest money and be involved in the decision making process of the business. Problems can arise if partners are unclear on what their contributions are expected to be.
2. Allocation of assets
The allocation of assets is a key part of a partnership agreement. It determines what resources need to be allocated to sufficiently run the businesses, as well as cases where the business records a loss in profit. This is a very important thing to look for in a partnership agreement, as a partnership lacking measures for certain situations could be weak in nature and not be a fully developed partnership agreement. This section may also include the amount allocated for expenditure on behalf of the business. For example, travelling costs and general costs for workplace expenses.
3. Decision making processes
Decision making is an essential part of the day-to-day business within a partnership. If not set out correctly, this process can be extremely time-consuming and have a negative impact on your business. However, if this process has clear steps that are well set-out and cover potential disputes, then it can be a huge benefit toward the business. Establishing an effective decision making process will ensure that your business will run as smoothly as possible. Further, you’ll be able avoid disputes by ensuring each partner has a say in how the business is run.
4. The death or exit of a partner
In the case that a partner dies or decides to leave the partnership, there should be protocol within the agreement that addresses these issues. A number of negative consequences can come as a result of either one of these events if there is not a clause within the agreement that explicitly deals with the exit or death of a partner.
An effective clause will include some form of method that will allow other partners to vest their interest in the deceased or ex-partners share of the business. There is also a buy/sell agreement, which exists in the unfortunate situation of a deceased partner. This agreement is undertaken to create an effective and smooth approach of dealing with the death of a partner. Both a clause and buy/sell agreement should provide effective ways to deal with the exit or death of a partner.
5. Dispute resolution processes
There are various ways to deal with a dispute with a partner. However, some may end up costing your business a fortune, while others will resolve and help nurture the partnership. If there is a dispute, the inclusion of a dispute resolution clause is highly beneficial to the running of the partnership. Whether the process includes mediation, arbitration or conciliation, you should look for a dispute resolution process within a partnership agreement. Mediation, conciliation and arbitration all provide effective and cost effective forms of dispute resolution. These are crucial in situations where partners are unable to make difficult decisions. There is the option to take a dispute to court, however, this process is lengthy and costly as opposed to the methods above.
These 5 things to look for in a partnership agreement will ensure you are ready to jump right into partnership confidently and efficiently. Partnerships are a great way to start a business, but it’s crucial that every parter is on the same page. If you have further questions about entering into a partnership, it may be worth getting in touch with a business lawyer.
Alex is currently a Legal Intern for Lawpath, working in the content team to help provide free access to informative legal resources. Alex is studying a Bachelor of Laws at the University of Notre Dame.