Many business partners simply don’t have a written agreement in place.
While this can be ok during the good times it can become troublesome and expensive to resolve disputes, especially if the terms of the partnership have not been properly documented in writing.
Partnership agreements can pre-emptively act to head off disputes as they layout clear obligations, rights and dispute resolution methods.
Resolving disputes quickly can mean that the commercial relationship is not damaged and can be quickly corrected if you do have an issue. Furthermore, it will enhance the business brand and image if the partners are in sync and place importance on dispute resolution.
Without a partnership agreement, business partners must revert to the law. Business partnerships laws are governed by different state Acts, such as the Victorian Partnership Act 1958 or the NSW Partnership Act 1892 No 12.
Navigating the law and case law can be more complex and open to interpretation. An agreement will cut through much of this and make the operation of the business partnership much simpler and smoother. By having an agreement in place, there is less or less impact on the business or consumer confidence, if any disputes between the partners are quickly settled.
Having a written partnership agreement will help in the following ways:
Outline the responsibilities of the business partners
The rubber really hits the road when business gets going and the expenses start to pile up. If one business partner feels they are doing all the work it can be challenging for them to hold the other partners to account. An agreement can outline the responsibilities of the parties and help reduce the friction that is bound to come up if this happens.
Documenting the investment
To start a business partnership you will either have skills, cash or equipment that is required. Many partnerships might also need a further cash injection or a further capital investment and one business partner may contribute more than the other/s. Having an agreement dealing with these issues will make it easy to distribute the profits and secure your investment.
Outlining Obligations & Liabilities
It may be appropriate to define what obligations the parties have if there is a division of responsibilities.
Outline how a partnership is terminated or ended
Most small businesses only last a few years. When you are setting up a new business venture it is important to keep in mind how things will end. There are many different ways that a business partnership can be unwound and often one partner will buy out the other/s. An agreement will outline the ways in which any partner can exit the business or partnership and whether there is any first right of refusal granted to the existing partners.
Whilst you don’t expect a dispute or having to close your business, but as COVID-19 taught us anything can happen and to prepare well. Having a clear guide on how to end the business partnership will help both parties. It will be more cost-effective and faster to have an agreement that takes this into account from the outset than having to muddle through negotiations later. It will help you end the business relationship and move on with minimal stress and uncertainty.
What happens if a partner is sick, incapacitated or dies?
A partnership agreement will outline what happens if one partner is ill, incapacitated or dies. This is very important as this is where one partner may feel they are doing all the work and handling all of the risk. Also, it will help protect your family or beneficiaries if you are unwell or die. It will formalize your business arrangements and outline what must happen to your stake. Your financial assets and investment into the business partnership will be more secure and easier to transfer to your loved ones.
Some spouses of business partners can be left out to dry and find themselves in a business partnership dispute with limited visibility and control. The process of exiting or transferring rights after the death of a loved one can be very distressing if there is no paperwork in place. It would be wise to also consult with your Wills and Estates lawyer to ensure that any business partnership agreement will not jeopardize your personal assets. You would want to ensure that there is a successor in place who can deal with the business should anything happen to you.
What happens if I don’t have a business partnership agreement?
Unfortunately, we usually hear from clients when their business partnership has an issue and many don’t have agreements in place. Getting a partnership agreement in place upfront will save you money in the long run by avoiding common disputes An agreement will have the process in place to deal with common disputes and sets a timeframe to ensure that each party comes to the table to negotiate in good faith .
If you do have a dispute and don’t have an agreement you must revert to the law. Not having an agreement means significant legal costs for you, as it takes a lot more time and effort to enforce a verbal agreement than a written one. This can also be harder to negotiate and more open to interpretation and often cases the law will need to be researched to see how the courts may be likely to interpret a certain behavior or circumstance. It is obviously a lot easier to interpret a wording of an agreement.
Most disputes will resolve after the parties get a clear understanding of their legal rights and obligations and start negotiations to settle their disputes. If people have this clearly laid out in an agreement it can change the way disputes are managed and minimize costs for the business.
Ending a business partnership
If you are looking to end a business partnership you should get advice from a lawyer. There are many loose ends that need to be dealt with and a lawyer will look to limit your liability and exposure. While you may negotiate most of this between yourselves you will need this documented to be able to enforce an agreement.
Relying on a template for this can be problematic especially as it won’t properly consider your legal obligations and liabilities. You could end up paying out more than you need to and end up having ongoing issues that need to be dealt with. Unless you have legal training, it is hard to interpret the wording of an agreement in a way that a court would accept. In settling a dispute, you don’t want to take any chances and will often work towards finalizing all issues or matters completely.
Getting the right legal advice on business partnerships is vital
Our lawyers are skilled at helping clients setting up a business partnership as we handle many of the issues that come along. With this knowledge we can help you avoid the common pitfalls and set out an agreement that is robust and well thought out.
A business partnership agreement should be comprehensive and protect your interests both now and into the future.
At PCL Lawyers, our business partnership lawyers are experienced in drafting business partnership agreements, disputes and helping clients end business partnerships. If you have a query regarding setting up or a business partnership dispute contact one of our lawyers today for assistance.
Disclaimer: This article has been prepared for general information purposes and may not apply to your situation. This information should not be relied upon for legal, tax or accounting advice. Your individual circumstances will alter any legal advice given. The views expressed may not reflect the opinions, views or values of PCL lawyers and belong solely to the author of the content. © PCL Lawyers Pty Ltd.
If you require legal advice specific to your situation, please speak to one of our team members today.
About The Author
Marilyn Wai is a Senior Associate in the Commercial and Commercial Property Department. Marilyn…