Why you need a partnership agreement for your business

You and your business partner have agreed in principle how the business will be run. For any other matter, you’ll deal with it as it arises. Good idea? Probably not.

It is essential for you and your business partner to document your arrangement from the beginning – to cover the positive (like distribution of profits), the not so positive (dispute resolution) and the everyday running of the business.

‘Partnership’ defined

A partnership is one of the most common types of business structures. Under Partnership Acts in each state and territory, a partnership is:

• a contract;
• between persons carrying on a business;
• in common;
• with a view to profit.

Generally, for a partnership to exist there must be some element of repetition which indicates the conduct of a business, and from this flows the aim of generating profit which is divided between the partners.

5 reasons to have a written partnership agreement

1. It gives you and your business partners a clear understanding of the rules and arrangements applying to your business relationship.

2. Unless there is an agreement in place, all partners are equal, and must share the business’ profits and cover losses, equally.

This is regardless of how much cash each partner contributes to the business, how much time each individual partner dedicates to the business and how much revenue each partner brings in.

3. Unless there is an agreement in place, your partnership will be governed by legislation in force in your state or territory.

The legislation is a one size fits all approach – it is beneficial to have a partnership  agreement tailored to your specific relationship, intentions and circumstances.

4. Minor disagreements may become insurmountable problems and possibly, result in dissolution of the partnership.

To avoid this, you need a clear, unambiguous statement of roles and authorities of each partner, and a dispute resolution procedure to have recourse to.

5. It lets you focus on the business of your business.

There’s a fair chance you started your business because you have a passion for the business activity. Having a partnership agreement means you spend less time in the long term managing your relationship with business partners and more time focusing on the business of your partnership.

What you should include in your partnership agreement

Your business partnership agreement should record matters such as:

• how the business' profits will be shared;
• how much money each partner brings to the partnership business;
• how new partners can join the partnership;
• how partners can be removed from the partnership;
• the different roles and responsibilities of each partner including decision making powers and authorities; and
• how to resolve any disputes.

By Cassandra Townsend, product manager and precedent lawyer, Thomson Reuters Cleardocs