Why it is important to have a Partnership Agreement

Business is all about partnerships – public-private partnerships, supplier relationships, collaboration with colleagues and competitors, and, of course, the way you work with your customers.

So it’s never good when you find your closest partnership—that with your business’s fellow owners—has begun to break down.

It’s the same old story – you start bright-eyed and bushy-tailed, full of optimism, but even if your business is successful, the cracks can show when you decide where to go next.

Without a partnership agreement in place, it’s hard to tell who has the decision-making power, and companies can collapse in a matter of minutes when the situation boils over.

Getting out of a partnership

If you do not have a partnership agreement and are unhappy in a business relationship, it’s usually quite easy to leave.

You may be able to exit the business simply by giving ‘notice’—which can be very short notice indeed—to the other people with whom you formed the company and have been working.

A partnership agreement prevents this from being so easy by setting out rules for introducing new partners and for those who choose to leave.

It will usually govern the financial implications of one person leaving or of closing the whole business, along with any related freehold or leasehold property issues.

Further protection

You can formalise your business arrangements in different ways, such as by forming a limited company, which creates an entity in its own right rather than just a partnership of individuals.

Again, without a limited company or partnership agreement in place, the individual members of the company’s management will usually be considered to be in a ‘partnership at will’, a situation that can be ended quickly, with little notice given to the remaining partners.

If you choose to leave, having one or more of these formal arrangements in place can help you avoid losing out on your share of the business. You may be able to claim a portion of any capital or profits that have accrued while you have been involved.

Creating a Partnership Agreement

A partnership agreement is an important document that can significantly impact your financial situation and the future of a business that you choose to leave or where you are one of the remaining partners.

This makes it important to make sure that the wording of your document is spot-on, so you might want to get a lawyer involved in drawing up the first draft and covering all of the possible issues that might arise.

You can download a template agreement from several online legal document providers if you don’t want to involve a lawyer. Some websites will even allow you to create your own partnership agreement by answering a series of questions.

Remember, too, that the partnership agreement is there to protect everyone involved and the business as an entity in its own right. So, if one of your colleagues is reluctant to enter into a formal agreement of this kind, you should ask some very serious questions about why that is.

Find out more about partnerships

Read these ByteStart guides for more information.

• How to avoid problems with partnerships
• How to set up in business as a partnership