Are you in a business partnership? Do you have a partnership agreement or operating agreement?
Lately I am dealing with more cases of issues with partnerships. Many of the issues would already be solved if a partnership agreement was in place. An agreement is as essential (if not more) as insurance.
What is a partnership?
First things first. A partnership is one of a number of business structures. It is formed when two or more people (up to 20) go into business together. Partners are not employees of the partnership.
Partnerships can either be general or limited. With a general partnership, all partners are equally responsible for the management of the business. Just like a sole trader, you (and your business partners) are personally liable for the debts and obligations of the business.
A limited partnership consists of one or more general partners (whose liability is unlimited) and one or more limited partners (whose liability is limited in proportion to their investment).
At June 30, 2016 Australia had 2,171,544, actively trading businesses. Of these almost 300,000 were partnerships. (Interestingly, the number of partnerships has decreased every year during the past four years.)
Partnerships are governed by state and territory law. The NSW – Partnership Act 1892 governs partnerships registered in NSW.
How does a partnership agreement help?
A partnership agreement makes sure each partners’ interests are aligned and protected. Most importantly, it provides guidance to mediate disputes that may arise.
I can see why people don’t often complete an agreement. A business partnership is a bit like a marriage (defacto relationship). At the start, the partners are often like newlyweds or first daters – still yet to fully appreciate each person’s strengths and weaknesses. Everyone is excited about the future and only thinking about the benefits. Establishing a partnership agreement isn’t as fun as coming up with the business name and logo or choosing the premises and equipment. The agreement is about putting plans in place for the stuff no one wants to contemplate happening – a partner getting sick or dying, a partner not doing the right thing or the business dissolving.
Completing a partnership agreement is relatively simple for most partnerships. It is much simpler, less painful and less expensive than trying to resolve issues down the track.
It is useful to think of it as part of the business planning process. It is the pre-nup and business will rolled into one, and a key risk management task. These days, couples getting married or getting together are encouraged to work through some key questions to ensure they know each other’s attitudes to roles, finances, and family.
With a partnership agreement, working out the capital input, roles and responsibilities and distributions for each partner is a handy way to make sure you have all the right skills in place and know the key tasks. It also helps you work out how well you and your partner work together and whether you have the same attitudes and values before you start laying out your hard earned (or borrowed) money and your time.
Partnership agreements can be even more important where an established business invites a new person to go in with them to expand the business.
What should be in a partnership agreement?
Partnership agreements aren’t that expensive or difficult to set up. You don’t have to get a lawyer to draft one, but they can ensure the document is worded to reflect actual intentions. If you do use a lawyer, use one who has completed a number of partnership agreements. He or she will know if you have left key things out and how to ask the right questions.
Here’s what a partnership agreement should contain:
- Partnership name, business address and ABN.
- Names of the partners.
- The start date.
- The partnership account and how it will be maintained.
- The roles of each partner and limitations. Decide whether every decision has to be unanimous, which sounds ideal but may hold your business back.
- How the capital, property and profits or (hopefully not) losses are distributed.
- Operation of partner’s shares.
- Rules for dissolving the partnership or expelling a partner.
- What to do if a partner dies, is sick or unable to work, or wants to retire.
- Dispute resolution.