Deciding to get into business with another person or a group of people is exciting. It’s a new business and you are all enthusiastic and ready to go. One of the first steps you’ll need to do is decide how you wish to legally structure the business. This will include a consideration of who will lead the business, how decisions will be made and what risks are involved. You will also need to consider the legal and tax obligations that your business will be subject to going forward. If you haven’t decided already on which structure you want to use, we recommend you read our blog on corporate structures and their respective strengths and weaknesses, so you and your business partners understand your options.
Partnerships and Partnership Agreements
Establishing a partnership type business is a good way for two to a small group of business partners to start a small to medium sized business. As we’ve already covered, partnerships are good businesses because they usually are cheap to set up, easy to maintain with minimal regulatory requirements and can be transformed into a registered corporation with little issue (though with some cost) if you feel the need to transfer structures.
The central component of a partnership business structure is your partnership agreement. This agreement will become the central governing document of your business, meaning that where any issues emerge, your business, lawyers, and the courts will all go to your agreement as the primary document for your business. A partnership agreement isn’t legally mandatory, but not having an agreement in writing exposes all partners in a business to potential risks in the event that your business runs into trouble. Partnership agreements also serve to align the interests of the partners on matters relating to the business, and the process the partnership will use to resolve any issues that may happen during the course of business.
What should my partnership agreement have?
Partnership agreements can include whatever the partners believe is important for the business. Most agreements contain:
- the name of the business and the registered address;
- the names of the business’ partners;
- the date of the agreement and the commencing date of the agreement;
- the obligations and rules that partners must uphold;
- operating rules of partners’ shares;
- dispute resolution;
- terms which address the retirement, death or expulsion of a partner;
- partnership account details and maintenance procedures;
- capital, property, profit and loss sharing rules; and
- the dissolution of the partnership.
How do I terminate a partnership agreement?
Depending on the structure of the agreement and legislation regarding partnerships, most partnerships can be terminated when a partner provides written intent to terminate the agreement. Following this, there is usually a notice period in the partnership agreement before the partnership is terminated, giving the remaining partners some time to determine what will happen.
Why should I see a lawyer about my partnership agreement?
Although partnership agreements are optional and can be very casual, a partnership agreement can become one of the most important parts of your business. By having a lawyer review your partnership agreement, you are:
- ensuring your partnership agreement is legally operable and complies with other legal agreements.
- have a process about how decisions will be made and what will happen in the event of a conflict in any decisions.
- how termination of the partnership will be dealt with if one partner should decide to exit.
- how the death of partner will be dealt with.
- consider matters to include in the partnership agreement.
Think beyond the agreement
Partnership agreements are important, but starting a business has many components. You should also be thinking and speaking to your lawyer and accountant about:
- intellectual property of your business
- taxation and accounting arrangements
- employment contracts and business policies
At Cohen Legal we can assist you by provide tailored advice based on your business needs and goals and recommend the right structure to best protect your business.