What you need to know about drafting a business partnership agreement
Starting a business is an exciting time, and it’s easy to get ahead of yourself. Before you get too excited, though, make sure you have everything in place so your partnership can run smoothly and without any surprises. In particular, if you plan to start the business with others, put together an agreement in writing before you begin.
This will help to prevent any misunderstandings or disagreements down the road. With that in mind, here are some tips on how to draft a business partnership agreement and what you need to know about drafting one for your partnership.
What is a Partnership Agreement?
A partnership agreement is a contract between two or more parties that define and regulate their relationship in regards to their pursuit of a common goal, whether it be providing goods or services. In order for it to be enforceable in court, there must be a consideration on both sides of an agreement. That means both parties must make concessions and exchange something of value.
The most important thing one should keep in mind when drafting a partnership agreement is that it will only hold up if all partners follow what was written.
Why do I need a written Partnership Agreement?
Most partnerships run smoothly and never require a written Agreement. But, problems can occur which is why it’s best to be prepared in advance. If you are planning on forming or joining an existing partnership, having a Partnership Agreement in place will help ensure that there is no confusion or conflict between parties as far as ownership, profit sharing and decision making are concerned.
On top of that, it will also protect each party financially should one of your partners unexpectedly quit or become unable to fulfill their financial obligations.
What is Include in Your business partnership Agreement
Everyone should have his or her own separate bank account in their name, but if your business is taking off, and there’s a good chance that it will, sooner or later it may be time to start thinking about how your partnership will work. Partnerships are generally divided into two types: general partnerships and limited partnerships.
General partnerships are more likely for smaller ventures with just one person who does most of the work and then shares profits. Limited partnerships are more common for larger enterprises where investors provide capital that gets put at risk through an operating company.
The rights and obligations of each partner
A partnership agreement should address any issues that arise in regard to how each partner’s share of profits is calculated, how they are paid out, and when they may be distributed. It’s also wise to identify what would happen if one partner withdraws from the venture or passes away.
Issues concerning ownership interest in your company are especially important if it has more than one owner; if there is any dispute, it can be difficult for partners to dissolve their relationship if there isn’t an established procedure already in place.
How do you determine each partner’s ownership interest? While everyone will have his or her own opinions on how equity should be divided among partners, professional advisors recommend that different partners contribute assets of value differently.
Where To Go From Here
Before signing on with any partner, make sure you lay out all of your expectations and concerns in writing. In fact, if it’s at all possible, have an attorney draft or at least go over your contract. For smaller ventures that don’t generate much revenue, a contract may not be worth it.
But for anything where money is involved—partnerships can and do go sour—there’s really no reason not to have one. Also, consider having an attorney review (or even write) your contracts every few years as laws and industry practices change over time. Finally, it might be smart to document any verbal agreements in writing anyways – just in case someone needs to prove something later on down the road.
Other types of business structure in Australia
The most common type of business structure in Australia is either as an individual trader or as a company. The other types are trust, cooperative, and public companies. Some businesses use more than one structure – for example, many family-run businesses have their members (including family members) incorporated into a single company structure and operate under an individual trading name.
Other small businesses may choose to be set up as two separate structures: for example, incorporating the whole business and then setting up a second structure called a sole trading arrangement which is owned by that incorporated entity but operated by an individual.
If you’re planning on starting your own small business in Australia there are plenty of resources available to help you get started. Also you could consult a business lawyer as well.