What is a partnership agreement and do I need it?
When starting a business, partners may feel excited and optimistic regarding the future of the company and may believe that they will always get along with one another. This is not always true.
There are a number of factors which can affect the day to day running of a business, such as change in legislation or personal vision for the company. These issues are likely to create a difference in opinion in minor matters or major transactions and lead to stressful situations. Therefore, it is wise to consider the possibility of obtaining a partnership agreement which protects everyone’s interest along the way.
What is a partnership agreement?
A partnership agreement is a formal contract that outlines each partners’ responsibility and aims to divide these equally between all parties. Depending on what type of company you have, a partnership agreement may take on a slightly different name. There are three types of agreements, including:
- Operating Agreement for limited companies;
- Shareholder Agreement for corporations;
- Partnership Agreement for general partnerships
Why create a partnership agreement?
There are major benefits to having a partnership agreement, some of these are discussed below:
This form of agreement helps to establish rules for each partner and dictates how a partnership is run. A major benefit to having such an agreement in place is that it removes any doubt as to the partners’ position and role within a company, thus, leading to fewer disagreements.
If a partnership agreement does not cover a particular situation, there may be disagreements concerning its operation which could result in solicitors being involved. If the dispute is not resolved, it will cost the business time and money to reach a fair decision, especially if courts are involved. Planning in advance and setting out clear terms will help to remove the stress and reduce the chances of a dispute getting out of control.
The Partnership Act 1890
This piece of legislation will be used to govern a partnership in cases where there is no partnership agreement. This will put the company and its partners at a major disadvantage, as the law is quite archaic and will presume all partners have an equal stake in the business. This will not factor in a non-performing or disruptive partner and will contribute to further disputes moving forward.
If you do not have a partnership agreement, the law as mentioned previously, will assume all partners have an equal share. Therefore, this will not take into account how much each partner has contributed to the company in terms of capital and is likely to result in an unfair financial settlement for those who may not have invested as much or carried out the same level of responsibility.
As seen in the examples above, the main purpose of a partnership agreement is to ensure that all partners have a clear vision of their roles and responsibilities. It acts as a safeguard to protect their financial interests as well as dictate how partners can be removed. The main goal here is to ensure fair practices and reduce costs to the company due to disagreements and/or failure to perform.
This article is for information purposes only and does not constitute legal advice. Please get in touch with us by calling 01244 478730 or email email@example.com and one of our experts will be able to advise.