What are the Important Things to be Aware of When Drafting a Partnership Deed / Agreement?

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Date Created: 27 Aug 2020
Last Update: 31 Aug 2020

Due to the increasingly complex nature of the business under globalization, more business owners set up partnerships where two or more people run a business together. Each owner owns a portion of the business’ assets and liabilities respectively and they contribute to the business collaboratively with their diverse skills and expertise. Thus it would be useful to have a formal partnership deed / agreement to govern such relationships.

 

What is a Partnership?

 

A Partnership is a formal arrangement between multiple parties to share its management and profits. The primary features of partnership are as follow:

  • Every Partner must render information to any partner.
  • Every Partner must account to the firm for any benefit derived.
  • It is a fiduciary relationship between Partners who owe a duty of good faith towards each other.   
  • It is fiscally transparent for tax purposes. In other words, profits and losses are accrued directly to the Partners in their respective shares.  

 

There are multiple advantages of General Partnerships, such as: having fewer restrictions on capital flow, the business can be flexibility Recognised in most jurisdictions, there is less formality in creation and management, and the business would be more tax-efficient than a separate corporate entity.

 

However, several problems arise for General Partnerships: there is both a lack of separate legal entity and certainty, especially when the parties do not document the arrangement as a conventional partnership. Also, there is joint and unlimited liability for debts and obligations of the Partnership by the partners.

 

What is a Partnership Deed / Agreement?

 

Once you have decided to move forward with a partnership as more partners join your business operations, having a well-written partnership agreement is essential for the long-run of the partnership relationship. A partnership deed / agreement is a legally binding document that outlines how a business is run and allows the partners to structure their relationship to best suit their business before the actual launch. In general, a partnership deed / agreement details the roles of each partner, contribution, and distribution of capital and the procedures to terminate the partnership.  

 

What is the difference between a Deed and an Agreement?

 

Deeds are special documents which only take effect if formalities prescribed under the law are followed. Common law distinguishes between instruments which are deeds executed under seal and those which are agreements merely signed underhand.  By law, some written contracts must be entered into as deeds, otherwise they are invalid and unenforceable.  For example, transactions relating to land or a power of attorney.

 

There may be situations where a deed is preferred to a contract underhand, even though there is no actual legal requirement for it to be so:

  • a deed will generally be enforceable in the absence of valuable consideration; and
  • the limitation period for actions brought under a deed is generally longer than under an agreement.

A deed must be witnessed by another person over the age of 18 and the witness cannot be a party to the deed.

 

As the Partnership Agreement is an important document, some people may prefer to have a Partnership Deed under seal instead. This is particularly the case if one or more partner(s) has not yet made any valuable contribution to the partnership.

 

Why Do I Need a Partnership Deed / Agreement for My Business?

 

Technically, business relationships can be established with a mere handshake between partners. However, this is way too risky for a partnership, as you can be held to unlimited liability by the actions of your partner(s) once you entered a partnership. Partnerships are swarmed with uncertainties where partners are expected to face obstacles and liabilities together until the relationship is officially dissolved. Hence, you should not enter a business partnership with anyone until you and your potential partner(s) sit down and discuss through the intricate details of the partnership and draw up a formal partnership agreement.

 

A clear and comprehensive partnership agreement is vitally important for your business for several reasons. The primary aim of having a partnership agreement is to have all rights and responsibilities of partners being set out clearly, and hence all involved partners know their roles in the business relationship. It can also reduce potential disputes and misunderstandings by setting out different aspects of a particular business as a protective measure and prevent full-blown disputes from ruining your business. Even if a dispute arises in the future, a formal partnership agreement in writing provides solid evidence for both parties in you ever run internal or external legal implications.

 

Drafting a comprehensive partnership agreement might not be simple, but it would be a valuable step for your business and benefit you and your partners to reduce potential expensive conflicts in the long run. Having a customized and full-rounded partnership agreement will be more suitable for your business as the terms and conditions are tailor-made for you and your partners. In addition, prevailing law and legislation in your jurisdiction may have authority over several aspects of your business in the absence of a written agreement, which might be unfavourable for you due to uncertain legal outcomes.

 

What should I include in my partnership deed / agreement?

 

General information such as the name of the proposed business, names of the partners, and a statement about the main objective and the general business information of the proposed business should be included in the partnership agreement.

 

Despite the general information mentioned above, you and your partners should always set out details of your potential business’ operation in order to facilitate effective communication between relevant parties. Read the article below to learn more about the important things to be aware of when drafting a partnership agreement! You can also scroll to the bottom of the article to download some FREE TEMPLATES of partnership agreements.

 

In addition, you and your partners should let lawyers review your partnership agreement before signing it in order to ensure all important terms and issues are sufficiently dealt with and are included in the partnership agreement.

 

  1. What is the Role of Each Partner? How should Partners divide Capital Contributions and Ownership among themselves?

 

Capitals, such as time, resources, and monetary contributions are essentials to start a business where partners shall share the responsibilities in contributing them. However, it is normal where partners are not contributing to an equal amount of capital. Some might be contributing more of their managerial and operational expertise while some partners might be responsible for injecting monetary funds. Nevertheless, the specific roles of each partner should be clearly set out in the agreement to avoid misunderstandings down the road.

 

The amount of ownership a partner is entitled to in a business is usually tied to his capital contributions unless otherwise specified in the partnership agreement. It may be more effective for a business to divide up contributions and ownerships to prevent unfair situations such as one of the partners is still entitled to his/her original portion of ownership even though he/she stops contributing to the business. Hence, details of the distribution of ownership and the conditions of retaining ownership shall be specified in the agreement.

 

As an unfair ownership interest hinders the development of your business by deterring the attractiveness of the business to new investors, you might consider adding a clause of membership vesting scheme. A partner subject to a vesting schedule earns his/her interests when he meets a certain condition and prevents a partner from getting more than the legitimate limit.

 

Here are some essential elements for your partnership agreement to include:

 

  • Specific roles of each partner;
  • Whether all partners can participate in the management;
  • Amount of capital each partner would contribute to starting the business;
  • Amount of anticipated capital each partner would be responsible for;
  • If the business requires more capital than expected, who should be responsible for the additional contributions;
  • Percentage of ownership of each partner; and
  • Whether partners are subject to vesting membership of your business, and relevant details of the scheme.



  1. How to Divide Profit and Loss Between the Partners?

As the old saying goes, money is the root of all evil, where financial disagreement is a common ground that erupts partnering relationships. Distributing profit and loss between partners is one of the most complicated issues to be dealt with partners before the actual launch of the business as slight ambiguities might cause the relationship to be blown-up.

 

However, you and your partners should discuss the future plans of your business before discussing the details of profit distribution as the scale of development will cause the financial distribution to change from time to time. For example, if you and your partners are aiming to expand your business shorter after its formal launch, each of you shall be entitled to less amount of profit as a large portion of the payback will reinvest to the business. On the other hand, if the business is planned to be a mom-and-pop styled or a small-scale business, partners might be entitled to receive profits early on.

 

In order to reduce potential arguments throughout the whole business relationship, the following should be considered by you and your partners before drafting your partnership agreement:

 

  • What percentage of the profits will be reinvested back into the business?
  • How much will each partner get? Whether all partners are entitled to distribution?
  • Will allocations be made in proportion to partners’ ownership or to be made equal to each partner regardless of their ownership?
  • When can partners receive their distribution?
  • Whether partners will be permitted to take draws?
  • Which partner will have the priority to get their distribution first?

 

 

  1. Who will be Responsible for Making Decisions?

 

Decision-making is an inevitable process for every business in every industry, where partners might come across situations where their business might be stalemated if the decisions were held unresolved. Hence, in order to reduce potential disputes arising from pending decisions and enforce checks and balances among partners despite their role and identity, a well-written partnership agreement should set out how partners tackle decision-making processes and the details of the relevant procedures.

 

Here are some questions you need to discuss with your partners in order to reduce potential arguments:

 

  • Whether consensus is reached by a voting system or by delegation?
  • Under what circumstances can minor decisions be made by a single partner?
  • What types of major decisions require a unanimous vote by partners?
  • What constitutes a major or minor decision?

 

Nevertheless, the list above is not an exhaustive list of questions for you to consider as you and your partners might have other decision-making procedures in mind that are more suitable for your business.

 

 

  1. How will Disputes be Resolved?

The last thing you would want to get out of your partnership relationship is definitely burnt bridges with unnecessary legal expenses and liabilities. However, there are no magic bullets to eliminate all possible disputes from its roots as we all are distinct individuals, and we might not agree with all the decisions or ideas our partners have in their minds. Disputes are inevitable in business relationships and they can become deadlocked where mediation, arbitration, or lawsuits might intervene. Hence, setting out details of the dispute resolution process of your business in your partnership agreement is particularly important for both you and your partners to reduce unnecessary costs when a dispute, unfortunately, really arises.

 

Here are some questions you might want to consider before writing them down in the partnership agreement:

 

  • Whether mediation would be the first step for you and your partners when a particular dispute become deadlocked?
  • Whether you and your partner wish to wish to rely on arbitration to settle differences?
  • Whether you and your partner wish to directly terminate the partnership relationship without seeking mediation/arbitration?
  • What is the role of your business advisory board when disputes arise?

 

Going to court should always be you and your partners’ last resort as lawsuits are extremely costly and many disputes can actually be settled with clear procedures being outlined beforehand without court intervention.

 

 

  1. What Happens if one Partner Dies/ becomes Disabled/ becomes Incapacitated?

It might be awkward to talk about death and similar unfortunate situations with your partners but the benefits of doing so worth the talk. It would be extremely stressful for the remaining partners to continue on the business under the occurrence of such unfortunate events, hence making arrangements beforehand by setting out the relevant procedures clearly in Partnership Agreements can minimize the effect on your business.

 

Here are some questions you need to discuss with your partners beforehand:

  • How will other partners carry on the business?
  • Whether the deceased/ disabled/ incapacitated partner would take over the original share of partnership?
  • Whether the partnership relationship will dissolve immediately?
  • Whether a buy-sell agreement would be involved?

 

  1. What Happens if Partners wants to terminate the relationship?

Similarly to the above paragraph, it is natural to avoid talking about a future breakup before even starting the business. Nevertheless, business separations happen all the time and it is essential to include the details of process and procedures for departures or termination of business relationships to avoid unnecessary costs and resources wasted in the future.

 

Here are some elements which you should include in your partnership agreement:

 

  • What steps should be taken to legally end the partnerships?
  • What laws govern the dissolution process in your jurisdiction?
  • What forms and documents are you legally compelled to submit?
  • How assets and interests are dealt with upon termination?
  • What are the details of the valuation process of your business?
  • Where can the business be sold and under what circumstances?

 

  1. What are the different forms of Partnerships?

 

General partnership – Under General Partnership, there is unlimited liability and each partner is liable for all business decisions made by other partners and the whole of the liabilities of the venture. Generally, the liabilities, debts and contributions are equal among all partners. Any change to the identity of the partners will entail a new partnership arrangement which can be an expensive and time-consuming process. Nevertheless, there are several advantages of having a General Partnership such as:

 

  • Set up procedures are relatively simple and not-so-expensive.
  • Internal structure is more flexible.

 

Limited partnership – Under Limited Partnership, there are both general and limited partners. General partner is more involved in the business and has rights to make business decisions, where they had to bear unlimited liability at the same time. Limited partners have limited liability but they are not involved in the day-to-day management of the business. This is popular as investment vehicles (where the majority of participants are passive investors) but not suitable for commercial joint ventures as limited partners must not be involved in the management of the venture. The advantage of having Limited Partnership are:

 

  • sensitive details of the venture can remain completely private between the partners.
  • Limited partners can be changed without dissolving the whole partnership
  • Limited partners are not liable for other debts and liabilities accrued by other partners.

 

Partnership Deed Format / Partnership Agreement Templates

 

The complex nature of the business world under globalization renders it difficult, if not impossible, for you and your partners to predict all possible obstacles and challenges lying in the future business. Hence, full preparation would be the best way to cope with these uncertainties and letting your business thrive in the market.

 

To learn more about different types of partnership and partnership agreements, you can read the following article:

https://docpro.com/doc451/introduction-to-partnership-limited-partnership-and-llp-agreements-guide

 

We understand writing a partnership deed / agreement from scratch might be very difficult – download our FREE PARTNERSHIP DEED / AGREEMENT TEMPLATES below before you start writing one! You are also advised to consult lawyers after customizing your own partnership agreement with the templates below in order to make sure the necessary elements to protect your business venture are all included.

 

  • Partnership Agreements:

 

Parties Involved

Degree of Strictness

Loose

Neutral

Tight

2

https://docpro.com/doc428/partnership-agreement-loose-light-2-parties

 

https://docpro.com/doc422/partnership-agreement-neutral-2-parties

 

https://docpro.com/doc425/partnership-agreement-strict-tight-2-parties

 

3

https://docpro.com/doc427/partnership-agreement-loose-light-3-parties

 

https://docpro.com/doc421/partnership-agreement-neutral-3-parties

 

https://docpro.com/doc424/partnership-agreement-strict-tight-3-parties

 

4

https://docpro.com/doc426/partnership-agreement-loose-light-4-parties

 

https://docpro.com/doc420/partnership-agreement-neutral-4-parties

 

https://docpro.com/doc423/partnership-agreement-strict-tight-4-parties

 

5

https://docpro.com/doc419/partnership-agreement-loose-light-5-parties

 

https://docpro.com/doc417/partnership-agreement-neutral-5-parties

 

https://docpro.com/doc418/partnership-agreement-strict-tight-5-parties

 

 

  • Limited Liability Partnership Agreements:

 

Parties Involved

Degree of Strictness

Loose

Neutral

Tight

2

https://docpro.com/doc446/limited-liability-partnership-agreement-loose-light-2-parties

 

https://docpro.com/doc443/limited-liability-partnership-agreement-neutral-2-parties

 

https://docpro.com/doc449/limited-liability-partnership-agreement-strict-tight-2-parties

 

3

https://docpro.com/doc445/limited-liability-partnership-agreement-loose-light-3-parties

 

https://docpro.com/doc442/limited-liability-partnership-agreement-neutral-3-parties

 

https://docpro.com/doc448/limited-liability-partnership-agreement-strict-tight-3-parties

 

4

https://docpro.com/doc444/limited-liability-partnership-agreement-loose-light-4-parties

 

https://docpro.com/doc441/limited-liability-partnership-agreement-neutral-4-parties

 

https://docpro.com/doc447/limited-liability-partnership-agreement-strict-tight-4-parties

 

5

https://docpro.com/doc439/limited-liability-partnership-agreement-loose-light-5-parties

 

https://docpro.com/doc438/limited-liability-partnership-agreement-neutral-5-parties

 

https://docpro.com/doc440/limited-liability-partnership-agreement-strict-tight-5-parties

 

 

  • Limited Partnership Agreements:

Parties Involved

Types of Partnership

General Partner

Limited Partner

Neutral

2

https://docpro.com/doc461/limited-partnership-agreement-general-partner-2-parties

 

https://docpro.com/doc464/limited-partnership-agreement-limited-partner-2-parties

 

https://docpro.com/doc462/limited-partnership-agreement-neutral-2-parties-1

 

3

https://docpro.com/doc459/limited-partnership-agreement-general-partner-3-parties

 

https://docpro.com/doc460/limited-partnership-agreement-limited-partner-3-parties

 

https://docpro.com/doc463/limited-partnership-agreement-neutral-3-parties

 

4

https://docpro.com/doc456/limited-partnership-agreement-general-partner-4-parties

 

https://docpro.com/doc457/limited-partnership-agreement-limited-partner-4-parties

 

https://docpro.com/doc455/limited-partnership-agreement-neutral-4-parties

 

5

https://docpro.com/doc453/limited-partnership-agreement-general-partner-5-parties

 

https://docpro.com/doc454/limited-partnership-agreement-limited-partner-5-parties

 

https://docpro.com/doc452/limited-partnership-agreement-neutral-5-parties

 

 

Please note that this is a guide on the general position of minority shareholder rights under common law. This does not constitute legal advice. As each jurisdiction may be different, you may want to speak to your local lawyer.

Keywords:

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General Partnership

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Limited Partnership

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Partnership Deed

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