What is a Partnership Agreement?
A partnership agreement is an agreement formed by two or more people (up to 20) who form a business partnership.
Yes, I know, that is a circular definition.
Let’s break it down.
A partnership is a type of business structure. There are a few common business structures in Australia, sole trading, companies, partnerships.
Sole trading is where one person goes into business working for themselves, such as contractors. Then there are companies. Companies have directors who control the running of the company. The directors are not personally liable if something goes wrong (unless they broke the law), instead the company is treated as its own legal person. This means that the company can sue and be sued, it can earn money and it can accrue debt.
Sit in the middle of all this. They are more complex than sole trading but not as complex as companies.
They’re more like sole trading, except that there is more than one person who owns the business. Partnerships are simple to set up and have fewer laws governing them than companies (just the way we like it!). They are cheaper to set up and run than companies. However they are riskier too. This is because each partner is personally liable for anything that happens in the business. Each partner is liable for the actions of the other partners and to creditors if the business goes bust.
Partnership agreements are the glue that binds the partners.
Given that there aren’t a lot of laws that govern the relationship between partners and the big risk that each partner is personally taking in setting up an operating the business, the partnership agreement is a very important document.
Partnership agreements define the nature of the relationship between the partners. They address issues such as:
- What is the purpose of the partnership
- When does the partnership begin
- Does the agreement have a fixed term or does it last for the length of the partnership (i.e. it continues on until the partnership splits up or is dissolved?)
- How much money is being invested and who is investing it
- What is the division of work
- What is the management structure? Is there a managing partner (like a CEO in a company)?
- What are the rights of each partner
- Who is responsible for managing finances
- Who has authority to transfer funds
- Who is allowed to enter agreements that will bind all partners
- How will profits be distributed
- How will disputes be resolved
- What happens if one partner leaves
- What is the procedure for ending the partnership
You are not legally obligated to put a partnership agreement in writing, but if we can quote Forrest Gump ‘stupid is as stupid does’ (meaning you’d be a tad silly not to). Putting the agreement in writing at the beginning of the partnership can save lots of headache, legal disputes and expense later on. We know. We’ve seen it.