The Vital Importance of Partnership Agreements

When starting out in business with a friend, colleague or relative, it is easy to think that everything will continue remain as pleasant and smooth running for the long term as it is at the beginning.

However, it is important to realise that business partnerships can go wrong. Relationships can turn sour for all sorts of reasons, in particular where things like the obligations and duties and financial input of each partner are not clearly defined.

The most common reason for a business partnership to fail is a lack of a written partnership agreement. What you may not realise is, when you go into business with one or more other people, even without a formal set-up, your association is likely to still be seen as a partnership in the eyes of the law. The implications of this are significant, in particular if a disagreement arises or one of the partners wants to – or has to – leave.

Taking a Step Back

There is always a ‘honeymoon’ period at the start of any relationship, and that applies to business partnerships too. Whilst you are swept up in the excitement of starting a new venture, the thought of any disagreements arising could not be further from your mind, and you probably won’t even consider a time when you or one of the other partners may wish to, or be forced to leave the business.

However, you should take a step back and consider various scenarios. What if an opportunity came up for you to relocate to another country and it just wouldn’t be viable to continue as a partner? You wish to leave, but there is no clear agreement as to what the business owes you, or what will happen to your shares. And here’s another possibility: what if one of the partners becomes ill, or passes away? Without a formal agreement in place that allows you first right to buy out their side, you could find yourself in business with their widow.

These are just two of many situations that can and do happen in business life. Precisely why it is imperative you set up legally binding, professionally drafted partnership agreements. The best time to do this is when everyone is getting along: so put it at the top of your to-do list.

What’s in a Partnership Agreement?

A good partnership agreement will include responsibilities, roles, salaries and other details concerning financial arrangements as well as exit strategies. The agreement should set out how the partnership would be dissolved in the event of one or more of the partners deciding they wish to leave, and what would happen should someone be forced to back out, or pass away. Of course these are difficult subjects to broach, but a frank discussion at the outset will help to avoid any upsetting and undesirable situations in the future.

Limited Liability Partnerships: You Still Need a Partnership Agreement

If you are setting up as a limited liability partnership (LLP) and assume this means everything is taken care of, you should be aware that without a written partnership agreement in place, should something go wrong the Limited Liability Act 2000 (LLPA) will apply. Some of the provisions of this Act may not be considered fair, such as the ability to expel a member against their wishes.

Setting up a new business partnership? Talk to your bookkeepers in the first instance about your financial position and the best way to formally set up your new business. Then take legal advice from recommended lawyers who specialise in partnership agreements. It’s the wisest move you’ll make in your new venture.

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