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Why it is important to have a Partnership Agreement

October 11, 2011

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 a good thing when you find your closest partnership – that with the fellow leaders of your business – has begun to break down.

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

Without a partnership agreement in place, it’s hard to tell who’s actually got the decision-making power, and companies can collapse in a matter of minutes when it all comes to a head.

Getting Out

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

You may be able to get out of 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 bringing the whole business to an end, 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, and not 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 thought of as being in a ‘partnership at will’, a situation that can be brought to an end quickly, with little notice given to the remaining partners.

If you are the one who chooses to leave, having one or more of these formal arrangements in place can help you to avoid losing out on your share of the business, as 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 have significant impacts on your own financial situation, and on 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.

Remember too that the partnership agreement is there to protect everyone involved, and to protect 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 be asking some very serious questions about why that is.