When two or more individuals come together to form a business partnership, for example a Limited Partnership or Limited Liability Partnership, it is advisable to have a correctly drafted Partnership Agreement carefully detailing the terms of the business relationship.
A Partnership Agreement helps to avoid conflict which may arise between the partners. Where the terms of a partnership are not clearly set out and recorded, disputes may arise over ownership division, the roles and responsibilities of the partners, and the division of assets upon termination of the partnership.
Get It In Writing
It is highly recommended that the partners enter into a formal written agreement assisted by professional advisers to ensure that the partnership is created and managed correctly while avoiding conflicts between the partners.
In the absence of a written agreement, disputes will often result in costly legal proceedings and unnecessary financial loss for all parties.
A Partnership Agreement is a legally binding document and allows the partners to structure the relationship in a way that suits their particular business. It typically establishes the right to share in profits or losses for each partner, the responsibilities of each partner, and proper procedures for changes to and termination of the partnership.
Areas Covered By A Partnership Agreement
The following are the main areas that should be covered in any Partnership Agreement:
- Name of the Partnership, details of the Partners and their designation.
- Business Activities: The primary business of the partnership should be clearly set out in the agreement together with any restrictions on the type of business or activities that the partnership may undertake.
- Management of the Partnership: Who is responsible for the management of the partnership? This ensures that the roles and responsibilities of the partners are clearly defined.
- Meetings of the Partners: Who is entitled to attend and vote at meetings? What is proper notice?
- Capital Contribution: It is important to agree and record the capital contributions and percentage ownership of each of the partners, if any. This will avoid disputes over ownership division.
- Profit Distribution: As all partnerships are different and may have different profit distribution criteria, it is important to clearly set these out in the Partnership Agreement.
- Financial Reporting and Taxation: The responsibilities and procedures for preparing and maintaining proper books of accounts and filing tax returns should be set out in the agreement.
- Transfers of Partnership Interests: The procedure for when a partner wishes to transfer their interest in the partnership. For example, written consent may be required from all of the partners otherwise the transfer is considered to be void by the terms of the agreement.
- Termination of Partnership: Partnership Agreements should set out the terms on which the partnership can be terminated and how assets and interests are dealt with upon termination.
- Resolving Disputes: Rather than pursue costly legal proceedings, a Partnership Agreement may provide for alternative dispute resolution such as mediation and arbitration.
Protect The Benefits
Structured correctly, Limited Partnerships and Limited Liability Partnerships can enjoy significant tax and confidentiality benefits in jurisdictions such as Canada, New Zealand and the United Kingdom.
However, in the absence of a correctly drafted Partnership Agreement, these benefits may be negated by minor disputes which would otherwise be avoided by the terms of a written agreement.
Given the above and the number of issues to be considered, it is strongly advised that professional advice is sought to draft a Partnership Agreement that best suits your client’s expectations, so that they can enjoy the full benefits of a partnership structure.