Why you need a Partnership Agreement eveytime

Why you need a Partnership Agreement

Why bother?
Because general partnerships have unlimited personal liability.

A Partnership Agreement is the first step in quantifying the duties, roles, obligations, and percentage of liabilities between partners. Unless there is an agreement in place, all partners are equal and must share the business profits and cover losses, equally.


They reduce the likelihood of partners disputes

A partnership has no independent legal status so there is always the potential for conflict between business partners. By establishing an agreement early on key issues, such as 'which shareholder should have the casting vote?' are brought to the surface which can then be cleanly and appropriately addressed, avoiding costly future shareholder disputes.


They provide a dispute resolution process

 Its highly beneficial to have a process of dispute resolution set out on paper, to protect the interests of the business and its members. This will allow for a timely and fair resolution of any dispute, given partners have already agreed to a method of resolving their issue and will understand the process involved.


They provide a clearer understanding of the company for future investors and supply chain managers

Supply chain managers routinely ask new supply-chain members for a written capacity statement document to confirm the stability and ongoing commercial capacity of all new supply-chain members. These inquiries routinely seek to confirm the existence of Key Person Protection, Fixed Overheads Protection, and the existence of any necessary Partner Agreement between the business owners.


They substantiate business maturity and stability

Partners are jointly and severally liable, which means that as well as having a shared liability for all the debts of the partnership, they are also individually personally liable for all debts incurred by or in the name of the partnership.


They protect the founding partner's interests

As a founder of a business, you’re usually looking to protect your initial capital and sweat equity invested. A Partnership Agreement can allow you to ensure your founding shareholders maintain the desired level of control (and reward) in the company moving forward.


They provide an agreement on how to Exit the Partnership

 This allows for partners to be objective when discussing what will occur if one of them wants to leave the partnership. They can outline agreed procedures for a partner who wants to leave the partnership. For example, how much notice a partner needs to provide of their intention to leave, how outstanding debts will be paid, and what rights, if any, will departing partners have if they want to start a similar business.

Basic Rules for Protecting a Business

Basic Rules for

Protecting a Business

Don’t know where to start?
Here are some basic guidelines to follow when looking to protect your small business.


Always Protect the Costs-to-Stay-Open-for-Business first

The costs to stay open for business are the 'fixed overhead costs' and are often contractual in nature. Make sure you have 12 months of fixed-cost funding on hand, just in case, so you can have a business to come back to after you recover from an unexpected sickness or accident, or so you can have an active business to sell as an ongoing concern if you have not yet recovered after 12 months. Insuring the Fixed Overhead Costs reduces the risk to a small business.


Always Protect the Key Revenue Maker

The biggest risk to a small business is usually its overreliance on its Owner. Whether the Business Owner, a Specialist Expert or a Key Person, most businesses derive the bulk of their revenue from a few key individuals.

Insuring the Key Person to the business protects a business from the financial dips that can occur if there's an unexpected loss of an owner, manager, partner, or skilled employee through sickness, injury or even death.


Always Protect the Business Debts

Businesses use debt to start-up or to grow. Whether these funds are supplied by the owner (Directors Loan Account) an external funder (using 1st mortgage security over property assets) or investors (usually a combination of mortgages and Director Personal Guarantees), nothing stops a business like an unexpected and immediate call-up of debts, well before they're expected to be repaid. Nothing stresses a business and its suppliers as having difficulty meeting its loan and debt obligations. Insuring the Business Debts & Liabilities from sickness, accident, or even death of the Owner, Business Partner or Key Person reduces the risk to a small business.


Always Protect the Business Ownership

Owning a business in Partnership with another means all the Partners need to protect their portion (equity investment) in the business to make sure the future control of the business stays with them. A forced change in ownership, due to one or more of the partners unexpectedly suffering a motor vehicle accident, ill health, or even death and then selling their shares, could destabilise the business ownership and risk its future. Protecting business ownership with a Partnership Agreement, Company Powers of Attorney and Insuring the Business Ownership, help reduce the risk to a small business.


Find a Risk Adviser specialising in working with Small Business Owners and their Families

Protecting yourself and your family from the risk of running a business is key to business and family harmony (and peace of mind). This is because small businesses and the families that support them have different risks, liabilities, and time constraints than average employee-based families. The team at Sapience Financial specialise in working with small business owners and their families, Sole Traders, Partnerships and Multi-owner business, and their Companies to help them protect themselves from their business.

two business partners sitting in separate chairs in disagreement

What is a Business Partnership Agreement?

A Partnership Agreement is a documented contract between the partners of a business that outlines the agreed terms of the business and how it will operate under two or more people.

When would I need one?

You have a friend or professional colleague. Together, you have a vision so you work together in your new business to make a profit. Congratulations, you are in a partnership. Now that you are in a partnership, you need to document it. If you're looking for a future business partner, understanding the benefits of a documented Partnership Agreement will make you a better future business partner too.

What's in a Partnership Agreement document?

A documented Partnership Agreement is a written contract between the partners that clearly outlines roles, responsibilities, and how the business will be run between two or more people. 

A Partnership Agreement deals with:

  1. financial reporting responsibilities
  2. agreed to responsibilities of the partners
  3. each partner’s financial contribution – (called capital contributions)
  4. an agreed procedure for resolving disputes
  5. an agreed procedure for ending or resigning from the partnership
  6. a partner’s share of the business’s tax losses are offset against other personal income (aka the ‘flow through’ effect).

Not having a documented Partnership Agreement is high risk

We all love the simplicity of a partnership. Indeed, many people are in a ‘partnerships’ without their knowledge. But such undocumented partnerships are dangerous.

If you do not document your partnership, you can suffer significant risks and face potential losses because a general partnership carries the risk of joint and several liabilities of you and your partners.

Insight: An undocumented business partnership is dangerous. Missing this step may even disqualify you from participating in a bigger supply chain as many significant businesses reliant on consistent supply, will usually require a capacity statement to confirm a supplier's business stability and continuity is in place, before accepting you as a supplier.

What are the rules if you don't have a written Partnership Agreement in place?

In Australia, each separate state or territory has its own legislation regulating undocumented Partnerships. If you have no written partnership agreement in place, then you have to rely on out-of-date legislation in each state — (and good luck with that).

You can find the different state-based-partnership legislation below;

Advantages of a Partnership Deed

  • Simple– when compared to a trust or company
  • Cost less to set up – than a company or a trust (where partners are all individuals)
  • Inexpensive to run – no ASIC yearly fees like a company
  • Less paperwork – no reporting obligations to ASIC
  • Easy to understand
  • Losses flow straight to the partner – losses are distributed to the partners; in contrast, losses are trapped in a family trust, unit trust, and company
  • Low regulation and privacy – companies are over-regulated through the government agency ASIC. Partnerships (like trusts) are less controlled by the government

Disadvantages of a Partnership Deed

  • The partners are jointly and severally liable. That means each partner is liable not only for their own share of the partnership debts but also those of all the other partners. Unlimited liability means each partner is liable for the entire partnership’s debts. Let us be very clear: even if a person only had a 10% partner’s share, he or she is responsible for all 100% of the damage arising from the negligence if the other partners do not have the means to pay.
  • Unless you are a Partnership of Family Trusts there is no asset protection for each partner.
  • Changing of ownership is difficult. It usually requires a new partnership deed to be established. There may be transfer (stamp) duty and Capital Gains Tax (CGT) issues. This is when assets are moved from one partnership to another.
  • When a partner dies you have a new partnership so transfer duty and CGT may operate.

Case Study

Partnership Agreements | Jonathan and his 2 brothers' Story

Jonathan business CFO, and his two brothers

Jonathan and his two brothers are part owners in a truck repair workshop. He is the company's CFO and his brothers manage the business.

One morning Jonathan woke up with an unusual numbness in his arm but simply thought he’s slept on it during the night. Within hours he was in the hospital unable to move or speak. He’d suffered a mild stroke during the evening.

After the initial shock, the uncertainty of this situation soon began to concern his brothers and their families and how this situation would impact their family business. They had recently become guarantors for the business loans and with Jonathan off sick, the future looked precarious.

Doctors said the stroke would need rehabilitation and that he would be unable to drive for the next few months until they had determined the level of his physical and mental impairment.

With Business Risk Protection in place, this is what happened:
  • Keyperson insurance cover was in place and immediately paid the company a set amount of money to employ a contract CFO to replace Jonathan.
  • Loan protection was in place and paid the company a set amount of money so the business debts were immediately reduced by a third.
  • If Jonathan was expected to be off work for the long term, they had an agreement in place about long-term illnesses amongst the owners and how it will be dealt with, and how they would value the business in case the sick owner and their family needed to prepare for an exit from the business.

With an effective plan in place, creditors felt secure that the business was stable and able to continue to trade successfully.

Key Take Away:

If you’re part of a Partnership or in business with other people (especially different family members), you need clarity about these issues and how they will affect you and your family and a documented Partnership Agreement to make it legal.

Frequently Asked Questions about Business Partnership Agreements

What is the difference between a Partnership and a Joint Venture?

Like a Partnership, a Joint Venture is a relationship between two or more parties, but unlike a partnership, each party retains its separate identity.

  • A Partnership shares profits or losses between themselves. For example, a profit of $500K was made and now shared (distributed) in proportion to the Partnership Interest.
  • A Joint Venture shares output. For example, a successful computer hardware recycling venture was created and as agreed, the rare minerals belong to one party and the plastics belong to another party. The output is shared, not the profits.

A joint venture is often put together for a specific one-off purpose and therefore, unlike a partnership, joint ventures often have a short life and are often focused on short-term, one-off or isolated transactions.

How do I close a Partnership relationship?

Whatever the reason for dissolving a Partnership, a Dissolution of Partnership Agreement must be signed to legally end a partnership and terminate the legal liabilities that all partners were liable for. We can also provide that legal document.

How we can help

Partnership Agreements are an important part of protecting your business and your family, from the business.

  • We can supply this legal document.

Contact us for a confidential chat about your needs.

Related: Key Legal Documents for Business Owners

Related: Featured Business Articles

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