Partnership: agree to disagree … and other things

Often a business is created over a coffee with a friend, or a dinner discussion with a spouse or partner.  As such, many people “fall” into business and are trading or operating before they consider formalising business arrangements.  Increasingly, many small and online businesses are operating under the default position, a partnership.

What Is It?

A partnership is a private arrangement.  It arises from a relationship of any number of persons, often two, carrying on a business in common with a view to profit. Unlike a company, a partnership is not a separate legal entity and is not registered with the Companies Office.  The relationship is governed by the Partnership Act 1908, unless there are contrary contractual arrangements in place.

Why Have A Partnership Agreement?

A partnership structure can work very well for many businesses, but it is often not realised by those involved that in the absence of documented arrangements, the only way to ensure that you (and your partner(s)) determine the obligations that bind you, rather than the Partnership Act, is to prepare a tailored contractual arrangement.

Outlining the specifics of your relationship in an agreement, particularly before issues arise, can also help nurture the original relationship you had with your business partner.  A documented arrangement clarifies from the start what you expect from each other.

Cookie-Cutter Agreements

Every business is different.  As such, every partnership arrangement should be different.  Two electricians operating in the trade are going to require  different terms and conditions than two friends starting a clothing line or a café.  We always recommend taking the time to have an agreement specifically tailored to your business and your needs. 

At the end of the day, this is the agreement that underpins your relationship and your business.  The success or failure of both may rely on it.

What Should Be In Your Partnership Agreement?

While every partnership agreement should be different, there are some key elements in all. 

• The name of the partnership or firm;
• A description of the business and where it will operate;
• An indication whether the partnership has been formed just for a specific venture or whether it will be ongoing;
• Who is contributing capital and in what amount;
• How the profits will be divided amongst the partners;
• Ownership of the Intellectual Property in your business;
• How disputes will be resolved, if any occur;
• Who will have authority to spend money and to what levels with or without consultation;
• Procedures for withdrawing from or terminating the partnership;
• Procedures for bringing new people on board.

Your arrangements can be as fluid or specific as you wish them to be.  The perfect balance is one that allows for enough specifics to constructively guide the relationship and business, but that also leaves room for both to evolve and progress. 

Having said that, it is wise to agree on specific processes around disputes.  Determining how to resolve a dispute when you’re in the middle of one is just something else to argue about! 

Conclusion

Agreeing to disagree (amongst other things) before an issue arises makes good sense.  Often there are pre-existing relationships to preserve, so having clear boundaries and processes in place can help guide the partnership through tricky times.  

While I certainly can’t claim that a good partnership agreement will save a friendship or marriage, it will help guide behaviour during times of heightened emotions.  In that way it can assist goodwill to prevail. 

For advice on preparing your Partnership Agreement call 0800 733 445.