Businesses founded by partners start with all partners sharing the same vision towards their business. The ethos, ideals and hopes are aligned, but just like any relationship over time issues can emerge and the goals of each partner may change.
A documented partnership agreement can help deal with any changes or issues within a partnership, as it steps out how to move forward.
Profit sharing is one good reason to prepare a written partnership agreement. This document contains an outline of what portion of the profits each partner gets, presumably corresponding to their stake in the business, and what their roles and responsibilities are to the business.
Another good reason to prepare a written partnership agreement is liability. If one of the partners doesn’t pull his weight in the business, a resolution must be made to protect the ‘disadvantaged’ partner.
Profit and liability sharing should be equal. If you’re a junior partner who is receiving a lesser share of the profit, then you should naturally have lesser responsibilities when covering for losses.
What does a partnership agreement cover?
Every contract or agreement is different. The industry and nature of the business are only some considerations. However, as a general rule, these things should be covered;
- How much money each partner invests in the business
- How profits and losses are divided
- How much is each partner’s salary
- Roles of each of the partner and their responsibilities
- Who is going to provide the financial reports
- Access of each of the partners to business bank accounts and funds
- How disagreements should be resolved
- How the business is dissolved i.e. when a partner leaves or business is sold
- Rights of the partner if one is to start a similar business
As listed above, how a business is terminated forms part of the agreement. Whilst a contract won’t cover for all that may happen, it should cover most instances should a partnership split eventually happen. So getting it right from the start is a must if you’re thinking of getting into a partnership.
If you have question on partnership agreements, don’t hesitate to reach out to our business advisors for advice. Call us on (07) 5413 9300 today.