When establishing a new business where multiple parties are involved, many opt for a Partnership as the business type to be formed.
“However, it is seldom that we recommend a Partnership as a business type, as from a legal perspective, partnerships can become messy relatively quickly,” says Bèan du Plessis (B-Proc), founding partner of Baartman & Du Plessis Attorneys.
“For example, consider the following aspects of a partnership:
– The business is conducted in its own name, but forms part of the personal estates of all the partners.
– The partners will be liable for all debts of the business and their assets may be compromised when this business fails.
– The mismanagement of any partner’s personal finances may have a detrimental effect on both the partnership as well as the personal estate of the remaining partners.”
However, when a partnership is formed then it is imperative that a Partnership Agreement is put in place to protect the parties involved and minimise the risk of litigation around the partnership going forward.
What is a Partnership Agreement?
The Partnership Agreement is a written agreement between all parties that form part of a new venture, called the partnership. It details important elements of the working relationships, including responsibilities, expectations, investments, and the working relationships.
Most importantly, a Partnership Agreement sets shared expectations in place, to which all parties agree to.
Why is it important?
The Partnership Agreement is of utmost importance at the initial formation of the business. When the business is still in it’s “honeymoon phase”, many believe that “understanding and trust” will be sufficient – and many are wrong. With new businesses come stress, difficult choices and disagreements. This is when relationships break down quickly and when that happens the Partnership Agreement must be in place to resolve disputes and protect assets.
We especially see Partnerships fail among friends and family or spouses. These business relationships tend to go sour very quickly, as people lose sight of the fact that “a good friend/family member/spouse” has vastly different requirements than “a good business partner”. Identifying the most suitable business partner is key to the future success of any business, irrespective of which ownership structure you choose or the effectiveness of your corporate governance structure, memorandum of incorporation, or commercial agreement.
But having a Partnership Agreement in place allows all partners in the new business to address disagreements in a civil manner, remove non-performing business partners, add new business partners according to the stipulations of the Agreement, and protect their own initial investment into the new venture. The Partnership Agreement is important for all partners, as it protects minority and majority owners each to their own extent.
Is there an alternative to a Partnership Agreement?
If you are entering into a Partnership, you need a written and signed Partnership Agreement right from the beginning of the new venture. However, there are alternative Ownership vehicles to consider. The most popular alternative, if feasible, is a Joint Venture Agreement that is based on the merits of what each party brings to the table for a specific purpose.
Still considering a Partnership Agreement? Here’s what to include:
You want to make it as comprehensive as possible to exclude future disagreements – but at least a Partnership Agreement must address the following topics:
► What the initial investment is from each partner.
► How profits and losses are shared among partners.
► How new partners can be added, or existing partners be removed from the venture.
► The roles and responsibilities of each partner in the business.
► How disagreements and disputes will be resolved or addressed among partners.
When it comes to deciding the vehicle of Ownership for your new business, it is always important that an experienced legal or corporate professional help you understand the impact of the decision you are making – along with its possible and probable repercussions.
While a Partnership may look like a simple agreement, the consequences are not to be taken lightly.
