Partnership agreements are often put to the back of the queue in the early stages of a business
No-one sets out to fail and the tricky subject of ‘what if we fall out?’ is often not discussed and parties may be embarrassed to directly challenge this, especially as time passes.
To give your business the best chance for long term success, have the conversation and take some expert advice from an experienced corporate solicitor on getting a partnership agreement in place. Starting a new venture with a friend, family member, colleague or business connection can be an exciting prospect and with the two or more of you caught up in the early stages of a business, this drive forward can mean that some of the foundations you need to put in place to give the business the best possible chance of being successful for the long term get overlooked.
At ORJ, our litigation team has been involved in a number of partnership and shareholder disputes.
Time and time again the same trend comes to the surface as to the main reason why partnerships, relationships and consequently the business fails. This reason is that one party is deemed to not be pulling their weight.
It is important to bear in mind that this may not be how the accused party feels, but if one side is getting more results, for instance, then this can start creating a divide and without an adequate partnership agreement, these things are hard to resolve. Notice the use of the word ‘adequate.’ Beware that online templates for this type of agreement are not tailored to you and your goals; should a disagreement occur, the partnership agreement will be used and actually be detrimental to the business, detrimental to the parties involved in the partnership and the partnership’s future can be put at risk. There may be clauses drafted in the agreement which are not applicable to you and some that are missed out that only would have surfaced after having a proper consultation with a good solicitor.
A good, well-drafted agreement is one that your legal advisor has discussed with all parties and that has been agreed upon and understood. Your legal advisor will also bring up scenarios and sections that need to be carefully thought out and drafted into the agreement that may be unique to you or your partner’s situation. As an example, you may have another business and not considering or having advice on the ‘non-compete’ clause in the agreement, you may find you are in breach from the outset. There are many more examples.
When starting the partnership, it is vital to get advice on the structure of the partnership and knowing the consequences of not setting up as a limited liability partnership (LLP) for instance. If you do not get this correct, anyone deciding to sue, may well come after the partners’ personal assets, such as family homes and cars.
So, revisiting the fact that most partnerships fall apart because one party is accused of not working hard enough, without an agreement, how can you expect to resolve this? You will not be able to just drop one party’s profit share or reduce the money they take home unless agreed. You also have no real way of a partner leaving the partnership if they don’t want to so the only choice is to carry on or dissolve the partnership. A well-drafted partnership agreement will cover the exit of partners and can save large sums of money, stress and ultimately save the business as the process is already mapped out.
The general subject areas that a partnership agreement consultation with an experienced corporate solicitor at ORJ will include are outlined below (as a guide, but more will certainly be discussed), all of which will be drawn from an in-depth conversation covering your business, your goals and your expectations:
- Outlining who the partners are.
- Nature of the business.
- Considerations as to the set up of the partnership.
- Initial and on-going capital contributions to the partnership for each party.
- Profit shares for each party and related goodwill and intellectual property.
- The duties each partner agrees to carry out and the authority they carry.
- The management of the partnership including operational, financial (including accounts and finances), HR, legal etc.
- Partners holidays, sick and other HR issues relating to the partners.
- How the partnership will manage risk such as entry into other agreements.
- Exiting and entry of partners.
- Processes on how to change the agreement in the future.
In summary, having a well-drafted partnership agreement will provide a document that leaves all parties with no doubt as to the responsibilities they hold and the foundation this creates will enable you all to focus on making the business a success.