Going into business with a partner can be a great way to split the workload and share the costs associated with starting a new venture. But before you hand over half of your company to someone, it’s essential to draw up a business partnership agreement that spells out each partner’s roles, responsibilities and rights.
Creating a business partnership agreement can be complex, so it is vital to seek legal advice to ensure that your lawyer can include all the necessary information. This agreement is a legally binding contract you can create with the help of a lawyer who specialises in commercial law. Once the deal is in place, it should be reviewed and updated regularly to ensure it meets the business’s and its partners’ needs.
In this article, we’ll explain what you need to include in a business partnership agreement and give tips for ensuring the agreement is enforceable.
Why You Need a Business Partnership Agreement
Having a written agreement helps avoid misunderstandings later on by setting out each partner’s expectations at the outset. For example, if one partner thinks they will have sole decision-making authority whilst the other expects to have an equal say, that discrepancy can cause tension down the road.
Another reason to have a partnership agreement is that it can help you resolve disputes quickly and efficiently without going to court. If you do end up in court, however, an enforceable partnership agreement can be used as evidence of the partners’ intentions as stated in the clauses of commercial law. This can be helpful if one partner tries to deny their obligations under the agreement or if there is ambiguity about what was agreed upon.
Finally, a partnership agreement can protect your assets if your business is sued or goes bankrupt. If your business is held liable for damages or debts, your assets will not be at risk if you have a valid partnership agreement.
All of these make it necessary to have a business partnership agreement before entering a business. You can seek the help of a lawyer specialising in commercial law or a commercial law firm in Sydney like Madison Marcus.
Types of Agreements in Partnership Business
There are four types of agreement in partnership business, depending on the level of control each partner has over the company:
- General Partnerships
In a general partnership, all partners have an equal say in how the business is run and share responsibility for its debts and liabilities. This type of partnership is suitable for companies with a simple structure and relatively few assets.
- Limited Partnerships
In a limited partnership, at least one general partner has complete control over the business, and one or more limited partners invest money in the company but do not have any involvement in its day-to-day running. Investors often use this type of partnership if they want to invest in a business without being actively involved in its management.
- Limited Liability Partnerships (LLPs)
An LLP is a hybrid of a general partnership and a limited partnership. Like a general partnership, all partners have an equal say in how the business is run. But, like a limited partner, each partner’s liability is limited to the amount of money invested in the business. Accountants and lawyers benefit from this type of partnership if they want to go into business together but want to limit their liability if the company fails.
- Joint Ventures
A joint venture is a business arrangement in which two or more parties agree to cooperate to achieve a common goal. Business partners use joint ventures to finance, develop and commercialise new products or technologies.
Can I Write My Own Partnership Agreement?
Yes, you can write your partnership agreement, but it is advisable to seek legal advice to ensure the agreement is watertight. A lawyer who specialises in commercial law will be able to help you draft a contract that covers all the bases and protects your interests.
How Often Should I Review My Partnership Agreement?
Your partnership agreement should be reviewed and updated regularly, as the needs of your business may change over time. For example, if you bring new partners into the business or want to change the way the business is run, you will need to update the agreement to reflect these changes.
Review your agreement if any significant changes in legislation could affect your business, such as changes to tax laws or employment regulations.
Rules of Business Partnership
The rules of a business partnership should be set out in the agreement and can cover things like how partners will make decisions, how you will resolve disputes and what will happen if one of the partners wants to leave the business.
Some standard rules that are often included in business partnership agreements are:
- Partners must disclose any conflicts of interest.
- Partners must act in good faith and in the business’s best interests.
- Partners must refrain from competing with the business.
- Partners must not engage in illegal or unethical activities.
- Partners must keep confidential information about the business.
Ensuring you include these rules in the partnership agreement will help the relationship with your partners run smoothly and protect the business if one of the partners breaches its obligations.
Including a buy–sell agreement in the partnership agreement can also help protect the business. A buy–sell agreement is a contract that sets out what will happen if one of the partners wants to leave the company or dies. This type of agreement can help to ensure that the business continues to run smoothly even if one of the partners is no longer involved.
Tips for Creating an Enforceable Agreement
To ensure that your agreement is enforceable, there are a few things you can do:
- Have the agreement drafted or reviewed by a lawyer who specialises in commercial law.
- Make sure that all of the partners understand the agreement and their roles and responsibilities under it.
- Be clear and concise in your agreement.
Requirements to Form Business Partnership Agreements
The contract should spell out each partner’s ownership percentage. This will determine how profits and losses will be divided, as well as what each partner’s voting rights are.
The agreement should also include a detailed description of the partners’ roles and responsibilities.
Finally, the contract should delineate how partners will make decisions and what happens if there is a disagreement. By including these essential elements, a partnership agreement can help to ensure that everyone is on the same page from the start.
Business partnership agreements should include the following:
- The partners’ names and a description of their roles in the business
- The nature of the company and its purpose
- The term of the agreement, i.e., how long it will last
- How the partners will share profits and losses
- How decisions will be made, e.g., by majority vote or unanimity
- What will happen if one of the partners wants to leave the business
- How partners will resolve disputes.
How Madison Marcus Can Help You
Whilst a business partnership agreement is not compulsory, it is still necessary to ensure the smooth-sailing operation of your business partnership. By having a legally binding contract, you can avoid potential conflicts between partners and have a written document to refer to if any issues arise. With the help of the right commercial law firm in Sydney, you can create a comprehensive business partnership agreement.
If you are considering setting up a business partnership, Marcus Madison can help. Be sure to contact our commercial law experts to draft an agreement that meets the specific needs of your business.
For all enquiries, contact us here.