Partnership agreements mirror the spirit and purpose of a more formalized business structure such as a company; however, they are not as severely influenced by legislation. In this, a partnership may be viewed as more of a contractual association or group of persons for a specific monetary or material benefit.
As such the partnership agreement – other than having to comply with the fundamental elements and principles surrounding the conclusion of a valid contract – may be tailored to one’s specific circumstantial needs as the majority of the agreement is variable.
The non-variable essential elements, however, prescribe that:
- the parties must contribute toward the partnership;
- the intention of the partnership must be to generate an income; and
- the business must be for the joint benefit of the parties.
With this in mind, the following points may be varied by the partnership agreement:
- The proportion of each partner’s share in its profits and losses – the default position is that this will be proportional to each partner’s contribution.
- The representative capacity of each partner and the partner’s ability to bind the partnership in third-party transactions; by default every partner may do so.
- Compensation, and any other particulars surrounding the remuneration for each partner’s contribution and operation as a partner.
- Ownership of property and specific assets as by default each partner owns equal and undivided shares in the property acquired by the partnership in relation to the proportional contribution.
- Specific or exclusive use of certain property owned and acquired during the partnership.
- The use of the partnership funds including disbursements and reasonable allowances thereof.
- Admission, removal or resignation of partners.
- The valuation of the partnership and what property will form part of the business venture.
- Dispute resolution principles and further remedies for breach, misconduct or even administrative conflicts such as deadlocks.
With the wide degree of flexibility present, partnerships are a viable, dynamic and often a relatively simple method of starting a business; however, due consideration must be given to the more subtle elements of this agreement so as to entrench the essence and true intention of your business within its fundamental framework. In doing so, one may guard against potential risks and eliminate any uncertainty that may be present between the partners, their use of the business’s assets and the general expectations of their respective partners, thus aiming to avoid conflict or disagreements, which may result in the dissolution or termination of the partnership.
A major consideration in the use of the partnership structure as opposed to the company structure is that a partnership does not provide limited liability and this should be carefully considered if the partnership structure is to be utilised.
Take time and care when drawing up agreements.
The devil is always in the detail.
Author: Charles de Meillon