Are You Considering a Partnership
If you have already decided that the appropriate structure for your business is a partnership, it is recommended that you consider a formal partnership agreement to govern arrangements between the partners.
If you want to know more about different business structures, then read about all the different business structures on our Legal Aspects for Small Business page
The following is a list of questions to answer when drafting a partnership agreement. The list is not exhaustive and you should seek specialist professional advice before entering into any business arrangement with others.
When will the partnership commence? What will be the duration of the partnership?
These points should be included in the agreement, particularly if the partnership is for a set period only.
How will partnership land be held?
If the land is already owned by one of the partners, will the land be transferred to all the partners or held in trust for the partnership? Or will a lease be granted to the partnership? Normally an agreement would be drawn up to allow the partnership to lease the land/buildings from the partner/owner.
If the place where the partnership business will be carried out is already leased by one of the partners, will the lease be assigned to all partners? Usually, the lease is rewritten or assigned to the new partnership as lessee.
Will separate accountants be appointed to draw up the partnership accounts? It is advisable to engage an accountant to attend to the affairs of the partnership who is NOT the accountant used by any partner for their private affairs.
Will there be any prohibition on partners assigning or changing their interest in the partnership?
It is essential to have these points clearly defined in the partnership agreement.
In what proportions will profits and losses (including capital and losses) be shared?
Will any partner be entitled to draw sums on account of profits?
The usual practice is for all partners to work equal hours and profits and losses to be distributed equally. Partners would normally take equal drawings per month against profits.
If one partner decides to sell his/her interest, how is the business valued? Do other partners get the right of first refusal?
Partnership agreements should detail the method of valuing the business and whether the right of first refusal to other partners, either singularly or collectively, will be applicable.
In what proportions will capital be contributed and belong to the partners? Will capital carry interest?
In the great majority of partnerships, all members contribute an equal amount of capital, which does not carry interest.
If a loan from a partner is contemplated, what will be the terms of the loan?
This could be covered in the partnership agreement, usually stated as at current bank lending rate for business loans.
Is it understood that all partners are jointly and severally liable to the full extent of their private assets for debts of the partnership?
In this regard, a partner who has more private assets than the other partner/s has more at risk. All partners should check their individual liability in relation to partnership deals with their own solicitor.
Will the majority decisions of partners govern all matters?
This could apply, however, in large partnerships to maintain harmony. A consensus of all partners may be appropriate for major decisions.
What happens if there are two partners and they disagree?
Generally in this situation, the status quo would prevail.
Are partners required to insure each other for the protection of the remaining partner/s in the event of the death of a partner?
Worth considering. This is one method used to finance the purchase of a deceased partner’s equity.
Talk to the Bayside BEC about your startup business and we can help you understand business structures in more depth and give you further advice.