When a handshake is not enough: why you need a partnership agreement

April 30, 2022 0 Comments

If you go into business with one or more persons but do not wish to establish a limited partnership, a partnership agreement will be deemed to exist without the need for a formal contract. However, although a written partnership agreement is not required to form a partnership, if you want to avoid uncertainty and the automatic application of potentially inappropriate statutory laws, a formal agreement is a good investment.

What happens if we do not sign an Association Agreement?

In the absence of a written agreement, the provisions of the Companies Act 1890 will apply. In essence, these provide that all partners are equal and share in profits, losses, start-up and operating costs, as well as the workload equally. While the provisions are intended to provide a fair framework for running your business, in reality, there are significant implications. For example;

– all partners will be entitled to share profits equally, regardless of how much capital, effort or skill they bring to the business

– any partner can end the partnership simply by notifying all other partners and the partnership will automatically dissolve if a partner dies

– All partners will be jointly and severally liable for the liabilities incurred by the company. This means that if one of the partners makes a commitment and does not fulfill it, you will still be responsible for remedying the situation. And if a debt cannot be paid, then the creditor can go after each of you individually, meaning that one of you may be forced to pay the entire debt on your own.

– if a partner has financial difficulties, his creditors can take assets from the partnership to solve them

– all partners will be considered “agents” of the company and thus may act on behalf of the other partners. This means that a person can enter into contractual and financial arrangements that are not good for business, but they will be binding.

– all partners have an equal voice in the business, which means it can take time to make decisions. Unresolved disputes can result in business breakdown.

What benefits will a Partnership Agreement offer?

A partnership agreement will provide a written structure for your business that clearly sets out the responsibilities, rights, distribution of profits/responsibilities of each partner, the rules regarding entering and exiting the business, and also the terms on which they are resolved. disputes and the partnership can be terminated. Carefully drafted, it will ensure you have a common vision for the business with mutually agreed goals. Most importantly, it will help avoid misunderstandings and costly conflicts.

Key areas to cover in your partnership agreement include:

a) ownership interests, taking into account any cash, assets, loans or investments made by individual partners

b} wages and compensation: how will profits or losses be distributed?

c} how the association will be managed

d) the specific responsibilities of each partner within the business, and what level of performance is expected of them

e) whether partners are expected to commit full-time to the business, or are allowed to engage in other business activities

f) what processes must be followed if a partner wants to leave the company or a new partner is admitted

g) whether the partners will be able to sell their interests in the business to third parties and, if so, how their participation will be valued

h) for what reasons a partner can be expelled from the company (for example, misconduct, breach of duties)

How do I establish an Association Agreement?

While there are many sites on the internet that offer seemingly cheap pro forma partnership agreements, this can be a false economy for a number of reasons:

1) There are three different types of partnerships: General Partnerships, LLCs, and Limited Partnerships – you need to make sure you set up the right vehicle for your needs;

2) no two associations will be the same in terms of specific requirements;

3. You are unlikely to reach an amicable consensus on a settlement without involving an impartial third-party advisor;

4) Without using a lawyer, you cannot be sure that the agreement complies with company law.

A better way to save money is to prepare a little before instructing your attorney: meet with your partners and compile a list of the provisions you want to include in your partnership agreement. Your lawyer will then have a good starting point for clarifying your requirements and drafting an appropriate agreement. However, since one attorney cannot represent the interests of all partners, each partner should instruct their own attorney to review the final document on their behalf.

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