Partnership Agreements

A partnership is formed automatically when two or more parties are “carrying on business in common with a view of profit.” This means that two or more individuals can inadvertently enter into a partnership and therefore become subject to the laws surrounding partnerships without even knowing it.

As such, a partnership is one of the easiest types of businesses to form. In fact, a simple verbal agreement is often the starting point. Your existing business may already be a partnership without you realizing it.

A Partnership Agreement (also known as a general partnership agreement) is a legal agreement that safeguards the interests of each partner. It provides a structured framework for decision-making, capital contributions, and dispute resolution. It also clearly explains how income and losses will be divided, sets out rules for entering or leaving the partnership, and more.

A business Partnership Agreement ensures that everyone in the business relationship is on the same page by clearly defining the expectations and responsibilities of each partner. Investing in a Partnership Agreement is like investing in a solid foundation for your business partnership.

Whether you intend it or not, if you are carrying business in common with someone with a view of profit, then you are deemed by law to be a partnership. This means that the laws and regulations relating to partnerships apply to you and your partners. Why is this significant? Well, according to the Partnership Act in British Columbia, partners are presumed to share equally in profits and losses and are jointly liable for the partnership’s debts.

In other words, even if one partner contributed way more to the business, they share the profit equally. Even if one partner took on debt for the partnership without the other partner knowing it, they are also going to be personally liable for that debt.

Rather than letting the Partnership Act dictate your relationship with your business partners, having a tailored Partnership Agreement allows you to dictate your own terms.

Moreover, the cost of having a lawyer-drafted Partnership Agreement is likely to be significantly less than the cost of going to court if a legal dispute arises that could have been prevented by a well-drafted Partnership Agreement.

Here are some of the key elements that should be included in a Partnership Agreement:

• Management and Decision-Making Structure: How will the business of the partnership be conducted? Who will make the key decisions? What is the decision-making process?
  
  
• Ownership Percentage: Is it 50/50 ownership? Each partner contributes to the partnership in a variety of different ways (e.g., money, property, time, or skills.) In return, each partner is entitled to a percentage of the profits or losses of the partnership.
  
  
• Capital Contributions: How the partnership will raise capital? Are the partners responsible for making capital contributions?
  
  
• Division and Distribution of Profits and Losses: How will income and losses be determined and allocated among the partners?
  
  
• Partnership Property: What property is considered to be property of the partnership?
  
  
• Length of Partnership: Will the it exist for an undetermined amount of time? Or will it end after a project or venture is complete?
  
  
• New Partners: How can a new partner join? Will unanimous approval be required for admitting new partners?
  
  
• Partner Withdrawal: How can a partner withdraw from the partnership? There should be an exit strategy for the partners which outlines the circumstances and processes in the event that one or all of the partners agree to end the partnership.
  
  
• Confidentiality and Non-Compete: Will partners be prevented from engaging in competing businesses? Will they be bound by any confidentiality obligations?
  
  
• Dispute Resolution: How will disputes be resolved? Will the partners go to court or can they resolve their dispute via mediation or arbitration?

Have a Partnership Agreement tailored to the unique circumstances of your partnership. As this agreement and each of its provisions are so complex, it is important to obtain professional legal services. A partnership agreement template would likely be inadequate.

Partnership Agreements are often confused with Shareholders’ Agreements. However, these are two totally different agreements.

Both agreements are contracts that outline the rights and responsibilities of the parties in a business. However, they are used for different legal structures. A Partnership Agreement refers to an agreement between partners of a partnership whereas a Shareholders’ Agreement refers to an agreement between the shareholders of a corporation.

The key difference here is that a partnership is not a separate legal entity which means that partners of a partnership are jointly and severally liable for the debts of a partnership whereas a shareholder’s liability is limited.

As previously mentioned, a partnership is not a separate legal entity for tax or liability purposes. Each partner is fully liable for the debts and contractual obligations arising from the partnership. This means you could be personally sued for something that happens in your business.

If you want to limit your liability, consider incorporating your business. Doing so will also give you more flexibility in tax planning.

As a legally binding contract, a Partnership Agreement is legally enforceable as long as it meets all of the elements of a valid contract. Therefore, if a partner breaches the terms of the agreement, then the other partner(s) may seek legal remedies such as specific performance, damages, or injunctive relief to enforce the agreement and protect their interests.

Just ensure that all partners as well as future partners who should be bound by the Partnership Agreement sign it.

When it comes to Partnership Agreements, it is best to get a lawyer who is experienced in business law involved. A lawyer who has specialized knowledge of corporate law will ensure that your specific needs are protected.

They will raise awareness of any blind spots you may have. For example, they may recommend clauses that will protect you and your business in ways that you would not have otherwise thought of. Or at least help you truly understand what you are getting into.

We can provide advice on common practices and mechanisms and review your Partnership Agreement to identify any potential risks and clarify each party’s responsibilities. Set up a free consultation to discuss your business objectives today.