Which Terms Do You Need in a Perfect Partnership Agreement?

For any business entity or individual entering into a formal partnership, a water-tight partnership agreement is essential to lay the foundations of this arrangement. But when exactly do you need a partnership agreement and what sort of terms should be included?

What is a partnership, and how are they created? 

First, it’s important to understand what is meant by the term “partnership” from a legal perspective.  It is quite common for businesses that collaborate to refer to each other as “partners” - such as brand partners, reseller partners, etc. - but most of these will not be considered partnerships in the legal sense. 

A formal partnership is one where 2 or more parties are carrying on the same business together, and sharing the risk and reward associated with that business.  They can be created by simple (written or unwritten) agreement, or by registration of a Limited Liability Partnership (LLP) at Companies House in the UK, the Australian Securities and Investments Commission (ASIC) or the relevant equivalent bodies in each state in the USA.

Why Do You Need a Tailored Partnership Agreement? 

The legislation governing partnerships in the UK is set out in the Partnership Act 1890, the Limited Partnerships Act 1907 and the more recent Limited Liability Partnerships Act 2000.  There are some equivalent acts in various states in Australia, and the Revised Uniform Partnership Act in the US, which cover similar provisions.  

In each case, the legislation sets out the default rules that would govern your partnership business and the relationship between partners, in the absence of an individually agreed Partnership Agreement.  Given that some of these laws date back to Victorian times, they are unlikely to be well suited to a modern-day tech start-up.

Nowadays, partnerships come in many different forms and “flavours” and it is much better to have a tailored partnership agreement that suits the needs of all entities within the partnership, than to rely on, sometimes ancient, laws to protect your rights and interests.

The partnership agreement should outline how the partnership will make decisions and how partners are remunerated, as well as what would happen in various scenarios - such as a partner’s death, retirement or bankruptcy, or any significant event that could have a material impact on the partnership and its ability to conduct business as normal. 

Important Terms in a Partnership Agreement 

Partnership Name

If you are using a name other than the trading name of your business for the partnership, this would need to be recorded in the partnership agreement itself. 

Duration

Your partnership agreement should state specifically how long the contract will last. Will it go on indefinitely, or for a fixed period of time? Will the partnership end upon a certain event that would trigger the dissolution of the partnership, such as bankruptcy or the death of one of the partners?

Are partnership liabilities (risks) limited or unlimited?

Before entering into any type of partnership, it is of key importance to decide whether the partnership’s liabilities will be limited by registering a Limited Liability Partnership (LLP). 

Limiting liability protects the individual partners by ensuring that, in most cases, the risks of running a business stay within the partnership - rather than each individual partner putting their personal assets (such as their own money, house, car etc.) on the line

The process of registering a Limited Liability Partnership (LLP) is very similar to registering a limited liability company and should always be considered.

How are Profits (or Losses) shared?

Some of the most important, and most frequently contested, aspects of a partnership relationship is how the profits and losses relating to the business should be shared. 

Will partners also be employees and receive a salary?

Should profits and losses be shared equally, or will some partners be contributing more than others, and therefore entitled to a larger share?

When and how can profits be drawn out of the business?  Cash-flow and other considerations need to be carefully considered.

These are some of the key areas that can cause partnership disputes and should therefore be considered carefully with expert legal advice where needed.

‍Professional contract lawyers can advise on the most sensible partnership structure, and will ensure that whatever the partners agree is documented clearly so that there can be no confusion down the line.

Decision-making and Authority

One of the key areas of partnerships that should be considered carefully before entering into any agreement is the decision-making or authority of the partners. This section would outline how the business will be managed, including which matters can be decided on behalf of the partnership by a single partner with their own autonomy, which matters need majority or unanimous consent and who has the final say if the partners can’t agree.

Thought should also be given to when and how decisions are made, who needs to be present at meetings and how votes are counted and proportions calculated (e.g. whether a certain proportion of all partners need to vote in favour, or whether just those present at a specific meeting can make a decision).

Dispute Resolution

When it comes to partnerships it is easy to fall into the trap of assuming that the arrangement will remain in the cooperative spirit it was entered into, despite the many challenges along the way. However, as experienced business leaders understand, this may not always be the case and a clear system of dispute resolution should be in place.

The partnership agreement should outline the process for resolution and mediation, and whether or not arbitration would be needed for disputes that cannot be resolved by the parties.

Dissolution—Ending the Partnership

The partnership agreement should include what steps need to be taken to legally end the partnership if needed, for example if the business is not trading successfully, or the partners have a fundamental disagreement on how they want to move forward.

Expulsion of Partners

It should also be considered under what circumstances a partner would be expelled. Although this may not necessarily spring to mind when setting up an agreement with a trusted colleague, there could be a number of extenuating circumstances that disrupt the normal operation of the partnership and may or not lead to its dissolution.

For example, if one of the partners dies, files for bankruptcy or retires, will this mean expulsion from the partnership and would this automatically bring the partnership to an end and start the dissolution process? These are all the sorts of events and circumstances that would need to be detailed in the partnership agreement to ensure the partnership does not run into legal trouble if an unforeseen event should occur.

The best way to ensure you have all the correct terms in place and the agreement is legally sound is to consult a seasoned contract lawyer who can quickly go through all the documentation and give you a review in terms of its legality and suitability for purpose.

International Considerations and State Laws

For partnerships based in the US, it should be noted that different states have varying requirements for dissolving a partnership and the rights of any workers within their state borders. For this reason, it is essential to check the specific laws of the state you are operating within.

Similarly, for partnerships based in different countries, there will be different laws that apply with regards to the dissolution of a partnership agreement and what is required by all parties concerned.

Your contract lawyer can review any documents and advise on which state or national laws were to apply in this case, ensuring your partnership agreement fits all the relevant criteria.

Contact Biztech Lawyers

If you are looking to enter any type of partnership and want to ensure that the contract ticks all the boxes, contact our expert contract lawyers today.

Our partnership specialists can review any documents or agreements you are signing, ensuring that they not only meet all the requirements for the domestic law that governs them but also that they suit the needs of your partnership and that your stake as a partner is reflective of the net value your business entity brings to the partnership.

For any questions related to partnership agreements, or any other business contracts, we have dedicated experts on hand to answer any query you may have.