Most modern businesses are owned and run by a corporation. Small and medium sized businesses are often Pty Ltd companies owned and run by a small number of shareholders. Many larger businesses are listed public companies. It is now less common to run a business as a partnership.
However, the partnership still has a significant role to play in business. First, a partnership is inexpensive to set up. An oral agreement between two people to work together to make a joint profit, is sufficient to create a partnership. Further, in Western Australia none the least, the Partnership Act 1895 sets out a regime of provisions that are implied into any partnership. Some businesses are set up as partnerships for tax reasons. So if you decide to do business as a partnership, do you need a partnership agreement?
The answer is, emphatically, “yes”. Without a partnership agreement, there is a potential for disputes between partners about running the business, competing with each other outside the business, and what happens when one of the partners wants to leave the business. A well drafted partnership agreement can address these and other risks.
A partnership agreement should at least deal with the following:
How will partnership decisions be made?
The partners need to agree on how decisions will be made and what happens if there is a disagreement. A dispute resolution clause is a good alternative to costly litigation.
Where does the money come from?
The agreement needs to say how much money each person will put in to start the business. What happens if the business needs more money? Will the partnership get a loan or admit new partners? Who will guarantee the loan? What happens if the partners, or one of the partners, wants to sell the business?
How will the money be distributed?
When will the partners be able to take distributions from the business? If one partner is doing more work than another partner, how much will that partner be paid? What if there is a dispute about how much working partners are paid?
What happens when one of the partners wants to leave the partnership?
This is perhaps the most important question. The partners should agree, at the beginning of the business when everybody is getting along, what will happen when one of the partners doesn’t want to be involved anymore. You should create a fool-proof sequence to be followed to allow a partner to leave the business without causing the business to close, or creating an insurmountable financial burden for the remaining partner or partners.
Douglas Cheveralls have significant experience in drafting partnership agreements and resolving partnership disputes. Please contact us to discuss any aspect of partnership agreements or partnership disputes.