However, many businesses are still run as partnerships, often because a partnership is inexpensive to set up. An oral agreement between two people to work together to make a joint profit, is sufficient to create a partnership.
Further, in Western Australia, the Partnership Act 1895 (WA) sets out a number of provisions that are implied into any partnership. Some businesses are set up as partnerships for tax reasons. So if you decide to do business as a partnership, do you need a partnership agreement?
The answer is, emphatically, “yes”.
What is a partnership?
A partnership is a business carried on by two or more persons in common with a view to profit. Partnerships in Western Australia are governed by the Partnership Act 1895 (WA).
Why do I need a partnership agreement?
Without a partnership agreement, there is a potential for disputes between partners about running the business, competing with each other outside the business, and what happens when one of the partners wants to leave the business. A well drafted partnership agreement can address these and other risks, and minimise the potential for disputes to arise.
See here further information about the kinds of disputes that may arise between partners in a partnership.
What should be included in a partnership agreement?
A partnership agreement should at least deal with the following:
- How will partnership decisions be made? The partners need to agree on how decisions will be made and what happens if there is a disagreement. A dispute resolution clause is a good alternative to costly litigation.
- Where does the money come from? The agreement should set out:
- How much money each person will need to put in to start the business;
- What happens if the business needs more money?
- Will the partnership get a loan or admit new partners?
- How will profits be distributed? The agreement should set out:
- When will the partners be able to take distributions from the business?
- If one partner is doing more work than another partner, how much will that partner be paid?
- What happens if there is a dispute about how much working partners are paid?
- What happens if the partners, or one of the partners, wants to sell the business? This is perhaps the most important question. The partners should agree, at the beginning of the business when everybody is getting along, what will happen when one of the partners doesn’t want to be involved anymore. You should create a foolproof sequence to be followed to allow a partner to leave the business without causing the business to close, or creating an insurmountable financial burden for the remaining partner or partners.
How Douglas Lawyers can assist?
Douglas Lawyers have significant experience in drafting partnership agreements and resolving partnership disputes. Please contact us to discuss any aspect of partnership agreements or partnership disputes.