Partnership Agreement and Key clauses – Ways to Make your Small Business Huge
By Will Elton, Last updated: 2021-06-24 (originally published on 2017-05-10)
Have a new business idea and want to get your business going?
Running a small business as a solo entrepreneur and thinking of roping in business partners?
A potential business structure that you can consider is the partnership, where two or more people share ownership of a single business.
A partnership enables a sharing of responsibility and allows a business to better raise funds. When operating as a partnership, it is crucial to put into place a Partnership Agreement, regardless of whether you and your partners are used to a more informal style of collaboration. Unlike a company, a partnership is not a separate legal entity.
It is thus important to ensure that your partners are all aware of their duties and obligations, as well as potential liability. There is bunch of legal document for partnership you should keep in your mind. Here, we let you know what to look out for when drafting a Partnership Agreement.
What is a partnership?
A partnership is a business structure where two or more people share ownership of a single business. In a partnership, partners are jointly and individually liable for the actions of the other partners. There are two main kinds of partnerships: general partnership and limited partnership.
The table below sets out the differences between the two kinds of partnerships. The most common form of partnership is a limited partnership, as it offers limited liability to limited partners.
Difference Between General Partnership and Limited partnership
|General Partnership||Limited Partnership|
|Types of partners||Only general partners||Both general and limited partners, each with different rights and obligations|
|Control over operations & management||All partners have the ability to actively manage and control the business||All partners have the ability to actively manage and control the business|
|Liability||Unlimited; each partner is jointly and severably liable for debts of the business||General partners are subject to unlimited liability while limited partners have limited liability|
Related reading: How to Choose The Right Business Structure When Starting Up
What is a Partnership Agreement?
A Partnership Agreement is a document that sets out how the relationship between the partners in a business venture will be governed.
What is the purpose of a Partnership Agreement?
It forms the foundation of the business partnership by protecting and aligning the interests of the partners. Should you not have a Partnership Agreement in place, your partnership will most likely be governed by default rules in your jurisdiction, such as the Partnership Act in Singapore, Australia and New Zealand, or the Partnership Ordinance in Hong Kong. As the default rules are a one-size-fit-all and may not work well for your partnership, it is best to discuss the business arrangements with your partners and clearly set out business expectations in a Partnership Agreement.
Key clauses to look out for in a Partnership Agreement
When drafting a Partnership Agreement, it is crucial to look out for the following key clauses:
- Details about the partners: This includes the types of partners and the capital contributions of each partner. One of the first things you must do is agree on a name for your partnership.
- Name and nature of the business: Some partnerships take the name of their partners, while others use an independent business name. If you decide to go with the latter option, make sure that the name is available for use;
- Accounts date of your business: It is important that you abide by your jurisdiction’s regulations for how the books are to be kept;
- Contributions to the partnership. It’s critical that you and your partners work out and record who’s going to contribute cash, property, or services to the business before it opens — and what ownership percentage each partner will have. Disagreements over contributions have doomed many promising businesses.
- Details of profit (and loss) distribution in the partnership: Your Partnership Agreement should set out how the profits and losses will be allocated. Will profits and losses be allocated in proportion to a partner’s percentage interest in the business? Will each partner be entitled to a regular draw (a withdrawal of allocated profits from the business) or will all profits be distributed at the end of each year? You and your partners may have different financial needs and different ideas about how the money should be divided up and distributed, so this is an area to which you should pay particular attention.
- Partners’ authority. Without an agreement to the contrary, any partner can bind the partnership (to a contract or debt, for example) without the consent of the other partners. If you want one or all of the partners to obtain the others’ consent before obligating the partnership, you must make this clear in your partnership agreement.
- Partnership decision making. Although there’s no magic formula or language for making decisions among partners, you’ll head off a lot of trouble if you try to work it out beforehand. You may, for example, want to require a unanimous vote of all the partners for every business decision. Or if that leaves you feeling fettered, you can require a unanimous vote for major decisions and allow individual partners to make minor decisions on their own. In that case, your partnership agreement will have to describe what constitutes a major or minor decision. You should carefully think through issues like these before you and your partners have to make important decisions.
- Banking and monetary restrictions of the partnership: This includes designating whether partners have the power to borrow money on behalf of the partnership;
- Retirement and expulsion options for the partners: The Partnership Agreement should set out how partners may exit the partnership, whether this is by voluntary or involuntary retirement, or written notice notice of expulsion, for instance for a serious breach of the partnership agreement or if they have failed to pay money owed to the partnership within the requisite number of days; and
- Details of options for outgoing partners: While it is not commonly discussed at the start of a business relationship, it is important to discuss exit strategies to be prepared for future scenarios (e.g. when not all the partners are in agreement about the business).Eventually, you may want to expand the business and bring in new partners. Agreeing on a procedure for admitting new partners will make your lives a lot easier when this issue comes up.
How do I end the Partnership?
Should the partnership fail or require to be wound up, you will need a Dissolution of Partnership Deed to properly wind up the partnership and divide any assets or liabilities between all partners.
Do you have any tips for setting up a business partnership? Share with us in the comments below!