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Do I need a Partnership Agreement?

Do I need a Partnership Agreement?

Partnerships are a common way for two or more people to go into business together. A partnership agreement is a legally binding document that outlines the ownership structure, management responsibilities, and decision-making process of the partnership. At Legally Yours, our lawyer members know that it is essential to understand the importance and necessity of having a partnership agreement in place to avoid any potential disputes or misunderstandings that may arise during the course of the partnership. 

Do you need a partnership agreement if you have a partner in the business? 

If you are operating a business of any kind with another person or entity, an agreement is definitely prudent. If you are operating a business under a “partnership” model, it is particularly important.  There are three types of partnership generally recognised in the laws of each Australian State/Territory: General, Limited, and Incorporated Limited Partnerships.  Incorporated Limited Partnerships must have a partnership agreement, but it is prudent for all sorts of business relationships, as these agreements clarify important issues like each party’s responsibilities, how disputes will be handled, how money will be raised and spent, issues of liability and insurance, etc.

Why is a Partnership Agreement important?

A partnership agreement is crucial for managing the profit and loss distribution within the partnership. It outlines how profits and losses will be allocated among the partners, ensuring transparency and fairness in the partnership’s financial matters. This helps in avoiding any potential disputes related to the distribution of profits and losses.

Do I need to register my partnership agreement with ASIC?

No, not with ASIC. Partnership law is governed on a State/Territory basis, and depending on where the relevant partnership is established and how it operates, it will need to be registered with the appropriate local authority. For instance, in Victoria, a “General Partnership” does not need to be registered with Consumer Affairs Victoria, but a “Limited Partnership” and an “Incorporated Limited Partnership” does need to be registered with Consumer Affairs Victoria.

What risks are there if my business partner and I don’t have a partnership agreement?

Depending on the nature of the partnership, not having an agreement may actually be a breach of legislation as detailed above. Importantly, if the relationship is not governed by an agreement (for instance, General Partnerships do not need to be registered in Victoria), then the common law and the applicable statute will apply to the relationship even if there is no formal agreement. 

However, on a practical level, operating a business under a partnership (or any other structure) without an agreement leaves many important issues uncertain, and when it comes to law and disputes, uncertainty is a recipe for disaster (and considerable cost). So, the key risks of operating without an agreement are that the parties will get into a dispute later, and it will cost a lot more money to unravel the problem than if the parties had agreed to an agreement in the first place. 

Managing Profit and Loss

A partnership agreement specifies the method for distributing profits and losses, which is essential for maintaining a harmonious partnership. It ensures that the partners are aware of their share of the profits and liable for their share of the losses.

Resolving Disputes

In the event of a disagreement or dispute between the partners, a partnership agreement provides a framework for resolving such conflicts. It outlines the procedures for addressing and resolving disputes, helping to prevent conflicts from escalating and potentially disrupting the partnership.

What should be included in my Partnership Agreement?

When drafting a partnership agreement, certain essential elements need to be included to ensure the smooth operation and governance of the partnership.

Percentage of Ownership

The agreement should clearly define the percentage of ownership held by each partner in the partnership. This detail is crucial for determining the distribution of profits and decision-making authority within the partnership.

Decision Making Process

The partnership agreement should outline the decision-making process, including how votes will be conducted, and the level of agreement required for making strategic business decisions.

Dispute Resolution Clause

Including a dispute resolution clause in the partnership agreement is essential for providing a structured approach to resolving disputes between partners. It outlines the steps and procedures to be followed when disagreements arise, thereby minimizing potential disruptions to the partnership.

When do partnerships need a written agreement?

While some partnerships may operate without a formal written agreement, there are specific circumstances where having a written partnership agreement is paramount.

Legal Requirements and Advantages

Certain legal requirements may necessitate the existence of a written partnership agreement, especially in the case of limited partnerships. Additionally, having a written agreement provides the partners with legal protection and helps in resolving disputes in accordance with the provisions outlined in the agreement.

Advising with a Lawyer

Seeking legal advice and guidance from a lawyer is advisable when determining the necessity of a partnership agreement. A lawyer can provide invaluable insights and ensure that the agreement aligns with the legal framework governing partnerships, reducing the likelihood of potential legal disputes in the future.

Ultimately, a partnership agreement serves as a vital tool for setting the foundation and governing the relationship between business partners. By clearly outlining the rights, responsibilities, and obligations of each partner, the agreement helps in ensuring a harmonious and efficient operation of the partnership. It also safeguards the partners’ interests and provides a framework for resolving conflicts that may arise during the life of the business.

Frequently Asked Questions

Q: Do I need a Partnership Agreement?

A: Yes, having a written partnership agreement is crucial for the smooth functioning of a partnership. It helps clarify the terms and conditions related to the partnership and the roles and responsibilities of each partner.

Q: What should I include in my partnership agreement?

A: Your partnership agreement should include important terms such as profit sharing, decision-making processes, business goals, dispute resolution, and the process for bringing in new partners or the exit of current partners.

Q: How does a partnership agreement relate to an operating agreement?

A: An operating agreement is specific to limited liability companies (LLCs), while a partnership agreement is for general partnerships. Both documents outline the details of the business’s operations and the relationship between partners.

Q: What does it mean for a partnership to come to an end?

A: The partnership may come to an end due to the death of a partner, withdrawal of a partner, or dissolution of the business. Having clear provisions for these scenarios in the partnership agreement can help avoid litigation and conflicts.

Q: Why is a written partnership agreement important for small businesses?

A: A partnership agreement is crucial for small businesses as it dictates the partnership’s scope, the rights and responsibilities of each partner, decision-making processes, and the process for the business’s dissolution, providing a clear framework for the business’s operations.

Q: What is the best way to handle the withdrawal of a partner from the partnership?

A: The partnership agreement should outline the process for the withdrawal of a partner, including the buyout of their interest and the redistribution of responsibilities. Having such provisions in place can ensure a smooth exit without affecting the business’s operations.

Q: What options do partners have in case of disagreements or disputes?

A: The partnership agreement should include a clear process for dispute resolution, which may involve mediation, arbitration, or other methods to resolve conflicts without resorting to litigation.

Q: Should partners seek financial advice or legal counsel when drafting a partnership agreement?

A: It is highly advisable for partners to seek the advice of an accountant and legal counsel when creating a partnership agreement. This can help ensure that the agreement complies with taxation laws and covers all necessary financial and legal aspects.

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This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practising lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Legally Yours Pty Ltd accepts or assumes responsibility, or has any liability, to any person in respect of this article.

This article has been composed utilising content provided by Clint Fillipou from the Legally Yours network.