If you decide to change your business structure or take on one or more partners or shareholders, then you need a written partnership agreement or a shareholders’ agreement. Shelley Bonney,...
Establishing a new business venture is always exciting. The early days of a bright new future are usually enhanced by the prospect of starting a business with people you know and trust. In the throes of such optimism there are often a hundred and one things to do, therefore little consideration is given to the necessity of partnership agreements, in the event of something going wrong.
However, without a solid set of rules to regulate your business relationship with your partners there may come a time when relying on verbal agreements is not helpful. For example, what if someone wants to leave the partnership, a partner dies, or some partners want to get rid of a rogue partner? In the absence of a written partnership agreement, The Partnership Act 1890 determines the rules that govern a partnership.
Interestingly, under The Partnership Act profits are shared equally, regardless of the skill, effort or capital each partner contributes, and all partners have an equal say in any decisions affecting the partnership. The Act also provides that any one partner can dissolve the partnership by merely giving the other(s) notice. Similarly, if one partner dies the partnership is automatically dissolved. Such events may result in severe consequences for the business, especially if the remaining partner(s) wish to continue running the business. Other practical issues to consider include agreeing how the profits will be shared; what decisions require unanimous agreement; what each partner is expected to contribute to the business, etc.
Partnership agreements are an essential part of business. They provide practical means of ensuring the business has strong foundations upon which to transact and deal with the comprehensive variety of fundamental issues that may arise from time to time. Agreeing how to regulate these matters early on may save you time and money down the line.
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