Partnering Up: A Guide to Crafting a Solid Partnership Agreement

Are you looking to start a business with one or more partner(s)? If so, you might want to consider conducting your business in the form of a partnership by entering a partnership deed. A partnership deed is an agreement between multiple partners that sets out the terms and conditions of the partnership for the business. The general idea behind a partnership is that each owner owns a portion of the business’ assets and liabilities and contribute to the business with their diverse skills and expertise.

Having a partnership deed/agreement alongside this arrangement helps to govern and formalise their relations to avoid dispute. It also ensures that the firm is overall running smoothly.

We will be discussing everything you need to know about partnerships and how you can prepare a partnership deed. Make sure to stay to the end as we have attached different types of partnership deed formats for downloading.

A. What is a partnership?

A partnership is a formal arrangement between multiple partners who share the management and profits of a joint business/venture. The primary features of partnership are as follows:

• Every partner must render information to other partners.

• Every partner must be accountable to the firm for any benefit derived.

• There is a fiduciary relationship between partners – this means they owe a duty of good faith towards each other.   

• The business must be fiscally transparent for tax purposes. In other words, profits and losses are accrued directly to the partners in their respective shares. 

What are the advantages of a partnership?

There are multiple advantages to general partnerships, such as:

• Having fewer restrictions on capital flow

• Simple business/working structure

• Easy business formation

• Less formality in creation and management

• More tax-efficient compared to a separate corporate entity.

What are the drawbacks to a partnership?

However, several adverse problems arise under the structure of the general partnership:

• There is both a lack of separate legal entity and certainty (especially when the parties do not document the arrangement)

• There may be joint and unlimited liability for debt and obligation of the partnership by the partners.

B. What is a partnership deed/agreement?

Once you have weighed the pros and cons of creating a partnership, you will need to move onto the next step, which is creating a partnership deed/agreement. This is essential to sustain a long-running partnership relationship.

A partnership deed is a legally binding document that outlines how a business is run and allows the partners to structure their relations to best suit their business before the actual formation of the partnership. In general, a partnership deed details the roles of each partner, their contributions, the distribution of capital, as well as the procedures that need to be taken to terminate the partnership.  

1. What is the difference between a deed and an agreement?

Deeds are special documents that only take effect if formalities prescribed under the law are followed. Common law distinguishes between instruments that 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. An example of this is transactions that relate to land or a power of attorney.

There may be situations where a deed is preferred to a formal 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

It should be noted that 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.

2. Why do I need a partnership deed/agreement for my business?

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

The primary aim of having a partnership agreement is to have all rights and responsibilities of partners set out clearly, such that all involved partners know their roles in the business relationship. Your partnership agreement will therefore need to set out protective measures to reduce the likelihood of potential disputes and misunderstandings. By being clear and comprehensive, it will ensure that even if a dispute arises in the future, a formal partnership agreement in writing serves as solid evidence for both parties if they ever run into legal implications.

Whilst drafting a comprehensive partnership agreement is not simple, it is a necessary step for your business, and will ultimately help reduce potentially expensive conflicts in the long run. 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 may result in legal outcomes that are unfavourable to you.

In certain countries, the partnership deed should also be registered with the local business registration/tax authority as a business and stamp duty should be paid upon the registration of partnership for the terms of the partnership deed to be enforceable. You may wish to check with your local lawyers.

C. What are the different types of partnership?

There are 3 main types of partnership for business – general partnership, limited partnership, and general liability partnership:

1. General partnership

Under a general partnership, there is unlimited liability, meaning that each partner is liable for all business decisions made by other partners and all liabilities of the venture. With general partnerships, the liabilities, debts, and contributions are equal among all partners. It should be noted that 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:

• Simple set up procedures

• Less expensive than setting up a corporation

• Flexible internal structure 

2. Limited partnership

Limited partnerships constitute both general and limited partners. The general partner is more involved in the business and has the right to make business decisions, but still must bear unlimited liability. Limited partners on the other hand have limited liability but are not involved in the day-to-day management of the business. Their liability is restricted to just the amount of capital they initially contribute. The advantages of a limited partnership are:

• Sensitive details of the venture can remain completely private between partners

• Limited partners can be changed without dissolving the whole partnership

• Limited liability – limited partners are not liable for other debts and liabilities accrued by other partners

• Flexibility – limited partners can be replaced

3. Limited liability partnership (LLP)

A limited liability partnership is a new form of legal entity created through statutes in several common law jurisdictions, e.g., in the UK. All dealings between Partners are governed by a membership agreement. It was developed to combine the benefits of limited liability with the flexibility of a partnership structure. 

Advantages of a Limited Liability Partnership (LLP):

• Corporate personality

• Risk is spread among the business partners

• Separate legal standing

• Tax transparent (advantage of a Partnership)

• Limited liability (advantage of a Limited Company)

• Organisational flexibility – structure can be changed

• Compatibility with any type of business

Disadvantages of a Limited Liability Partnership (LLP):

• Increased formality such as registration and public filing requirements

• When there is only 1 member for more than 6 months, limited liability is no longer available, and the continuing member takes on personal liability for the LLP

• All partners share liability

D. How to draft a partnership deed/agreement?

1. What should I include in my partnership deed?

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

You and your partners should always set out details of your potential business’ operation 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 FREE TEMPLATES of partnership agreements.

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

2. What is the role of each partner? How should partners divide capital contributions and ownership among themselves?

Capital such as time, resources, and money are essential to starting a business, meaning that each partner should share the responsibilities of contributing. However, it is common for partners to not contribute an equal amount of capital. Some might prefer to contribute more of their managerial and operational expertise rather than injecting monetary funds. Regardless, the specific roles of each partner should be 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 contributions and ownerships to prevent unfair situations such as one partner remaining entitled to his/her original portion of ownership even though he/she stops contributing to the business. Hence, the details of the distribution of ownership and the conditions of retaining ownership must be specified in this type of agreement.

As an unfair ownership interest decreases 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 would earn his/her interests when he meets a certain condition; this scheme 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 must contribute to starting the business;

• Amount of anticipated capital each partner would be responsible for;

• In the scenario where 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.

3. How to divide profit and loss between the partners?

We all know the old saying – money is the root of all evil. Unfortunately, financial disagreement is a common cause for the destruction of partnerships. Division of profit and loss between partners is quite complex and tough to do – especially before starting your partnership.

Before talking about profit distribution, you and your partners should discuss the future of your business as the change in scale of development will inevitably cause the financial distribution to change from time to time. For example, if you and your partners are aiming to expand your business shortly after its formal launch, each partner will be entitled to a lesser profit share as a large portion of the payback will go back into the business. On the other hand, if the business is a mom-and-pop styled or a small-scale business, partners might be entitled to receive profits early on.

To reduce direct conflict 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? Are all partners are entitled to distribution (in the first place)?

• Will allocation of profits be made in proportion to partners’ ownership or to be made equal to each partner regardless of their ownership?

• When can partners expect to receive their distribution?

• Are partners will be permitted to take draws?

• Which partner will have priority to get their distribution first?

4. Who will be responsible for making decisions?

Making regular decisions is crucial to every business in every industry. Partners might come across situations where their business is stagnant if the decisions were held unresolved. Hence, to reduce disputes arising whilst decisions are pending, 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 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?

Note that 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.

5. How will disputes be resolved?

The last thing you want out of your partnership is to incur unnecessary legal expenses and liabilities. However, is not one way to guarantee the prevention of all disputes as we all are distinct individuals, and therefore may not agree with all the decisions or ideas our partners have in their minds.

Sine disputes are inevitable in business relationships, setting out details of the dispute resolution process in your partnership agreement is particularly important for both you and your partners to reduce unnecessary costs when a dispute, unfortunately, 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 your last resort as lawsuits are extremely costly. Again, we want to emphasise the importance of having a well-written partnership agreement – disputes can be settled without intervention if clear procedures are outlined beforehand. No court intervention necessary.

6. What happens if one partner dies or becomes disabled/ incapacitated?

It might be weird talking about death and unfortunate situations with your partners, but you should still do so as it would be stressful for the remaining partners to continue the business after their occurrence without clear guidance as to what to do. 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 the partnership?

• Whether the partnership relationship will dissolve immediately?

• Whether a buy-sell agreement would be involved?

7. What happens if partners want to terminate the relationship?

Again, while it is natural to avoid talking about a future separation before even starting the business, business separations happen all the time. You must include details of the process and procedures for the termination of business relationships to avoid unnecessary expenses.

Here are some elements 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?

E. Partnership deed format/partnership agreement templates

The complexity of conducting business makes it almost impossible for you and your partners to predict all possible obstacles and challenges lying in the future. Hence, full preparation remains the only way to cope with these uncertainties.

If you want a quick summary of the 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 that writing a partnership deed/agreement from scratch is very difficult – so instead of stressing, download our FREE PARTNERSHIP DEED/AGREEMENT TEMPLATES below before you start writing one! We also would advise you to consult lawyers after customizing your partnership agreement with the templates below to make sure the necessary elements needed to protect your business venture are all included.

• Partnership deed formats

• Partnership agreement templates

• Limited liability partnership agreements

• Limited partnership agreements:

Please note that this is a guide on the general position of Partnership Deeds and Agreements. This does not constitute legal advice. As each jurisdiction may be different, you may want to speak to your local lawyer.