The Importance of a Partnership Agreement
When establishing a Partnership Structure, the view of profits and running the business to success overshadows the possibility of any unforeseen circumstances or dispute arising. Therefore, it is always a good idea to establish a Partnership Agreement no matter whether the partnership is made up of individuals or corporations.
A partnership agreement is a legally binding document allowing partners to structure the way their professional relationship or association will operate.
Some of many reasons as to why a Partnership Agreements are beneficial, include:
- Protecting one partner in case of death of the other;
- In case of dispute arising between the partners;
- In case of sale of business to a new partner; and
- In case of dissolution of business.
The document establishes the rights and responsibilities of each partner, including a process for termination and a process of changing the partnership. The intent of having a well- tailored partnership agreement is to protect each partner if any of the above circumstances were to arise.
A well – tailored partnership should consider:
- Partner Details:
Setting out the name of the partnership (if there is one), including each partner personal details and designations.
- Percentage of Ownership:
Entrenching each party’s percentage of ownership in the business or company, as well as how profits and losses are to be distributed between partners.
- Responsibilities and Obligations:
Ensuring the roles and responsibilities of every partner is clearly identified. As well as appointing a managing partner and documenting their duties.
- Tax Obligations and Financial Reporting:
A Partnership Agreement can set out who oversees and maintains the books and compliance with tax obligations, including lodging required tax returns on time.
- Meeting of Partners:
Establishes rules on partner meetings and proper notice of the meetings. Including, who is entitled to attend and vote.
- Transfer of Interest:
When a partner wishes to transfer their interest to another, the rules as to how they can do this is set out in partnership agreements.
- Termination Clause:
In case of partnership termination, the method in which it can be successfully terminated as well as how assets of the partnership and interests are to be distributed between the partners.
- Dispute Resolution Mechanisms:
In case of a dispute arising, a partnership agreement may offer and provide for alternative dispute resolution methods such as mediation or arbitration which can be less time consuming and less costly then legal proceedings.
- Dissolution:
A Partnership Agreement should lay out the process in which a partnership is to be dissolved or transfer of partnership. Some partnership agreements set out measures that if a partner intends on selling their half, they must first offer it to the first original partner to buy them out before deciding to sell to a third party.
On many occasions we are approached by clients who are in dispute with their partner that do not have binding Partnership Agreements drafted. Therefore, it is hard to establish which party is at fault and where to negotiate and compromise. Given the reasons above it is always strongly advised that a Partnership Agreement is drafted and executed for individuals or companies that intend or have established a partnership. Our firm can be of assistance for any advice regarding Partnership Agreements or drafting one to reflect your industry and scope of business.
This article is a summarised guide on Partnership Agreements and some of main contents and clauses in a Partnership Agreement. If you’re seeking independent legal advice to reflect your circumstance, please feel free to email Nick Karolidis at nick@karolidis.com.au or contact (03) 9942 7790.