The Importance of Partnership Agreements
Are you forming a business partnership? It is important to formally set out the details of the terms of the business relationship in writing to avoid any potential conflict between the partners.
Should all types of partnerships (e.g. GPs, LPs, LLPs, etc.) have a partnership agreement?
The answer in one word: absolutely. Failure to have a partnership agreement allows the legislation governing partnerships to default over any agreements between parties. Limited liability partnerships are variations on a general partnerships and are quite similar in nature. However, limited partnership agreements are typically quite different in structure.
What is the single most important clause or element in a partnership agreement, and why?
One of the most important clauses in a partnership agreement deals with dispute resolution and the exit of a partner and its impact on the business relationship. Without such provisions, a partnership might have to be wound up in its entirety as a result of a dispute, and this can cause serious issues, both tax and others for all partners involved.
What is a common mistake small business owners make with partnership agreements? How can it be avoided?
A common mistake business owners make with partnership agreements is reliance on precedents and/or stock materials in trying to capture their arrangements. Partnerships are the most flexible business structure because they can be tailored to every business structure. Reliance on boilerplates often ends up causing more trouble than they are worth. They typically add little clarity and are unhelpful in resolving issues between the partners. Thought and proper advice should be considered when preparing a partnership agreement.
What is joint and several liability in a general partnership?
Several liability means that, as between defending parties, one party may be held completely and fully liable for all the obligations, acts, omissions and negligence, while the other parties are not. Joint liability means that each party shares the liability equally. This language is fairly standard in most commercial agreements where you are dealing with multiple contracting parties, such as partnership agreements or loan agreements. The party held severally liable would generally have recourse against the remaining defending parties.
In a general partnership, do all partners have to equally share liability, or can you split liability unequally?
Without a partnership agreement, in a general partnership, all partners are equal and share liability. With a partnership agreement, liability can be mitigated between partners, as certain partners can take on greater liability than others.
What types of businesses are well suited to be a general partnership, versus a limited partnership or LLP?
A partnership is the most flexible of business structures for a multitude of reasons. Profit/loss allocation and governance are great examples of where creativity can thrive in such a business structure. Given the flow-through nature of a partnership structure, it can also be very beneficial for tax purposes. Typically, professionals are well suited to general partnerships, or limited liability partnerships where there is a variation of practice areas and oversight is concentrated in and with a partner in each functional area.
Limited partnerships are best suited when initial capital investments are intensive, and losses are forecasted to accrue for the first initial number of years. A brewery would be a good example. Limited partnerships also can be very useful as investment structure to a limited liability corporate partner and to provide returns to the investor partners free of risk other than to their initial investment.
If you’d like assistance setting up a partnership agreement, please don’t hesitate to get in touch with our Business Law group.