Should I Sign a Partnership Agreement?

Partners are joint owners of a business. They are equally responsible for the decisions made on behalf of the business and have the same goals.

However, partners are not always equal, like for instance, in some law firms where there are senior and junior partners. From a legal point of view, however, all partners remain equal.

Without a written agreement, all partners:

  • Take equal responsibility for the business’s activities and trading;
  • Share profits equally; and
  • Cover losses equally.

Partnership agreements ensure that there is a written record of the duties and responsibilities of partners which can be important if there is a dispute at some point later on down the track.

Partnership agreements cover issues including:

  • Salaries;
  • How disputes are handled;
  • The amount of money each partner brings into the partnership;
  • The different roles and responsibilities of each partner;
  • How the profits will be divided;
  • The requirements to provide financial reports;
  • What happens when the business is sold;
  • How partners can leave the business and the repercussions;
  • The rights of partners to draw on bank accounts;
  • The rights of departing partners to start a similar business.

However, partnerships also have their disadvantages. When a partnership has been formed, partners have unlimited liability so, if your partner borrows a large sum of money for instance, and then disappears, you are left having to pay off the whole debt.

How Do I Establish a Partnership?

Ask yourself these questions before consulting a lawyer to draft a Partnership Agreement:

  1. What are the names of the partners and the partnership?
  2. What contributions will each partner make to get the business going?
  3. How you will allocate profits and losses among partners?
  4. What duties and authority will each partner have?
  5. How will the partnership make business decisions?
  6. How can new members join the partnership if the business is growing?
  7. What is the process for leaving the business partnership?
  8. What will happen to the partnership in the event of a partner’s death? (consult a lawyer)
  9. How and under what circumstances can the small business partnership be dissolved?