This article contains information on different types of partnership, its pros and cons and what to include in a Partnership Agreement.
Written agreement between two or more individuals who join as partners to form and carry on a for-profit business. Among other things, it states the
(1) Nature of the business,
(2) Capital contributed by each partner, and
(3) Their rights and responsibilities.
A partnership does not have a separate legal existence like an incorporated firm, and the partners are jointly and severally liable for the debts of the firm. Even on withdrawing from the partnership they remain liable for already incurred debts and for future debts unless a proper notice of retirement is published. A valid partnership, however, can exist without a written agreement in which case the provisions of the statutes governing partnerships would apply.
Purpose of a Partnership Agreement
The purpose of a partnership agreement is to prevent disputes by determining the rights, responsibilities and powers of each partner.
The agreement anticipates certain situations and their impact on management of the business and determines in advance what measures will be taken in the event they occur. If a partner dies or wishes to sell his shares, or if there is a disagreement between two partners, you will know how to settle the matter quickly.
Types of Partnerships
There are 4 general types of partnership arrangements:
General Partnerships assume that profits, liability, and management duties are divided equally among partners. If you opt for an unequal distribution, the percentages assigned to each partner must be documented in the partnership agreement.
Limited Partnerships (also known as a partnership with limited liability) are more complex than general partnerships. Limited partnerships allow partners to have limited liability as well as limited input with management decisions. These limits depend on the extent of each partners investment percentage. Limited partnerships are seen as attractive to investors of short-term projects.
Joint Ventures act as general partnership, but for only a limited period of time or for a single project. Partners in a joint venture can be recognized as an ongoing partnership if they continue the venture, but they must file as such.
Silent partner is one who still shares in the profits and losses of the business, but who is uninvolved in its management, and/or whose association with the business is not publicly known; these partners usually provide capital.
As you can see it is folly to operate a business under any partnership basis without an agreement in place. Net Lawman provides you expertly drafted partnership agreements.
Retirement of a Partner
In the event of a partner retiring, you should agree to a retirement package and how the business will continue to be run. You may decide that the share of the business from the retiring partner will be distributed evenly between the remaining partners.
Introduction of new Partners
At some point you may decide to introduce another partner into your business. In such case, you should specify the terms and conditions of doing so which may initially be the agreement of all partners to acknowledge that a new partner is welcome. You may then suggest the amount of capital that the new partner needs to invest into the business and the rights and benefits that they will receive from doing so.
Dissolution of Partnership
If your partnership ceases to trade, then you need to determine how the business will be split between all partners. This will be a split of the money after all remaining stock; assets and equipment have been sold.
Should a partner decide to leave the partnership, you should agree terms that determine what type of employment the partner can go into. This may state that the leaving partner cannot go into employment that is in direct competition with the partnership.
Death of a Partner
Should the unfortunate event of the death of a partner occur, it is important that you agree what will happen with the business. For instance, if you decide that the business will continue to trade, then you will have to state how the deceased partners share of the business will be split between the remaining partners.
Dismissal of a Partner
You must decide terms that will detail when a partner can be dismissed from the partnership and may include breach of contract, personal finance problems, linking personal debts to business assets, etc. You should also state if they will be relieved with a pay out, such as their initial investment, depending on the financial situation of the business.
Some Provisions of Partnership
Partners are free to agree to any terms they like, provided the terms are not illegal or contrary to public policy. With that in mind, a business partnership agreement includes provisions relating to the following:
Nature and purpose of the partnership. This guarantees that partners will not deviate from the essential purpose of the business.
Capital contributions of each partner. This ensures that no one can dispute a partner’s capital contribution to the business. The contract should also account for other non-cash contributions such as goods, services, or time.
Profit and loss allocation. Normally a partnership allocates profits and losses equally, but this isn’t always the case.
Authority of each partner. The contract should determine which partner or partners will run the partnership on a daily basis, how the duties will be divided, and how decisions will be made.
How to admit new partners. Most agreements require a unanimous vote to admit new partners.
A course of action in case a partner dies. Normally, when one partner dies the partnership is automatically dissolved and liquidated. You don’t have to accept this process, however; it’s your agreement, and you can do what you want.
How to buy out a partner’s share. The contract should dictate which circumstances such as death, divorce, or illegal activity require the partnership to buy out a partner’s share in the business and how to execute the buyout.
Signature authority on partnership bank accounts. You may allow each partner to sign on behalf of the whole partnership, or you may require all partners to sign all checks.
Conflict resolution. There may be times when you simply cannot resolve a dispute. The contract may allow partners to hire a mediator or to submit the problem to binding arbitration instead of pursuing traditional legal action.
Australian Partnership Agreement Templates
Whether you are making a new partnership or admitting a new partner in an already existing partnership or dissolving a partnership, Net Lawman has a largest selection of partnership agreements suitable to your requirement.
Our templates have been drafted by a team of Solicitor and Barristers who are expert in Partnership Law of Australia. All our partnership agreement forms are up-to-date according to Australian legislation, and are drafted in plain English with explanatory notes.
Partnership Agreements – Partnership Form – Partnership Agreement – Partnership Template