Partnership agreements

Why written partnership agreements are important, and what to include in them.

If you go into business with a partner, either in an actual partnership structure or a company structure (where the ‘partner’ would actually be a fellow shareholder), there is a temptation to rely on an informal or verbal agreement about the nature of the business partnership. This temptation is particularly strong when the proposed partner is a close friend, family member, or lifestyle partner.

However, relying on an informal agreement can turn into a nightmare. We can never guarantee how our relationships will turn out. We hope for the best, but life brings many twists that can result in unexpected changes to relationships.

The simple business rule to follow is: in business, be businesslike.

This means putting aside all emotional reasons in favour of good business sense. It is also means clarifying the partnership agreement in writing to avoid any future “But you said . . .” or “But you promised . . .” type accusations and disputes.

Have a written agreement

If you’re going into a business partnership with another person, always have an agreement in writing. It is important that each party has a clear idea about what is expected of the other and what each will contribute to the partnership.

Get legal advice on the agreement so both parties are protected. Also consult business advisers or mentors.

Aim for fairness: a lopsided partnership agreement will only generate resentment that is likely to undermine the productivity a partnership is designed to achieve.

Tip: After reading this article, give your lawyer the basics of what you want covered and ask if you’ve missed anything vital, but don’t let your lawyer try to cover every eventuality in a lengthy ‘legalese’ document. Retain some flexibility and ability to change things if conditions change.

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    * Phone: 0800 42 49 46

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Points to cover in a written agreement

Avoid possible disputes by clarifying these points:

Business name

The name of the business.

Description

Description of the business and its location.

Duration of business

Whether the business is for a specified term or ongoing.

Professional advisers

Who the accountant and lawyer will be.

Bank

Which bank the business will be with, who will be authorised to sign cheques.

Contribution

What each partner will contribute in terms of money invested, skills, time, and clients or customers (shared or separate), and in what amount.

Responsibilities

What duties will each partner be responsible for?
For example, one partner may take responsibility for the day-to-day management of the business and the other for marketing and promotion of the business. Who will be responsible for major business decisions? Who will plan regular business meetings so all partners can understand what is happening in the other’s area of responsibility.

Cost sharing

How will the operating and overhead costs of the business be shared? Who will make expenditure decisions? What expenditure might each partner be liable for? For example, one partner (fellow shareholder) in a company might wish to have a new luxury company car every three years, the other might be content with a medium sized car that is changed every five years. There is potential for conflict and unhappiness unless sorted out in advance.

Profit / loss

How will profits or losses be shared? Will this be in proportion to the equity contributed to the partnership or business by each partner? Or will there be an adjustment for time, effort and skills contributed?

Who owns what?

Most businesses will generate some form of intellectual property either in tangible form (such as a patented or developed product) or intangible (such as a software program, a client database, or specialised knowledge and skills). Who has ownership of this property if the partnership or the company is dissolved? Ownership is not always clear-cut even in a company situation. For instance, a patent may be in the name of a person, not the business, although the business may have borne most of the costs of developing the patentable product.

Review process and arbitration

It is useful to include a review clause in the partnership agreement (for example, that the partnership should be reviewed annually) and also agreement on an independent arbitrator if the partners reach an impasse. Consider including a time limit on the partnership. For instance, the partnership will be reviewed after one year and dissolved if it is not meeting the aims of each party.

Disputes

How will disputes between the partners be resolved, for example, by arbitration?

Transition

Partnership agreements should include clauses covering transitional possibilities, such as the procedure if a new partner joins, or an existing partner dies, retires, or wishes to withdraw. For instance, if you were in business with a shareholding partner who decided to leave the company you may want first option to buy out the partner’s shares in the company rather than have the partner sell them to an outsider.

Consult your accountant about a method for valuing a growing business and check with advisers about insurance for partnership protection. Having insurance means that in the event of death or disability of one of the partners cash is available to allow the business to continue and at the same time settle the estate.

Reasons for going into a partnership

The main reason for going into partnership is to create a better result than could be achieved by one party acting alone. For instance, in professional partnerships (such as lawyers, doctors and accountants) the partnership allows each partner to share the overhead costs of business premises and the administrative staff. In a business situation the aim might be to achieve synergies by combining skills, such as marketing skills and financial skills.

Whatever the aims of the partnership, to avoid possible future disputes, it is important to clarify what results each party desires from the partnership.

Further information

Business structures in New Zealand
Sole trader, partnership, limited liability companies, co-operatives.

Plain English Explanations for Terms on this Page

Intellectual property
Legal term used to describe the patents, licences, copyrights, trade marks and designs owned by a company.

marketing
Marketing is often confused with advertising. In reality it is much more than this and must be considered before you launch your business.

Partnership
A partnership is where two or more people join together to run a business.