KYB Legal Insights: Why You Should Have A Written Partnership Agreement
The bedrock of any partnership is trust, the absence of which leads to conflict and eventual dissolution. Trust is founded and preserved when partners have a clear understanding as to the principles, procedures and rules governing their roles when engaged in the affairs of the partnership.
For this reason, having a written partnership agreement although not mandatory, is highly recommended. In this article, we discuss four considerations which are important in a partnership and how having a written partnership agreement would help shore up each partners’ trust in the partnership.
1. Splitting the Pie
No matter how uncomfortable this conversation may be, i.e. how much percentage of profits is each partner entitled to, it is always better to have this conversation at the very outset before deciding to form the partnership and before embarking on the business. The agreed distribution as captured in the partnership agreement should ultimately reflect the commercial contributions (or anticipated contributions) of each partner:-
Equal: This method is where the profits and losses are divided equally among the partners, regardless of their contributions to the partnership.
Proportional: This method takes into account each partner's contributions to the partnership, whether it be in the form of capital, time, or expertise. The profits and losses are then divided in proportion to each partner's contribution.
Priority: This method devises a structure where specified partners receive a priority distribution of profits before the remaining profits are divided among the partners. This can be used to differentiate founding partners from other partners or compensate partners who have contributed more capital or have taken on more risk.
Variable: This method allows for different profit and loss allocations for different aspects of the partnership, such as different business lines or projects. This can be used to incentivize partners to focus on specific areas of the partnership.
2. Who Is the Captain of the (partner)Ship
A partnership agreement should lay down the ground rules for a decision-making process. This may either be by appointing a partner to have the sole authority to make decisions or by implementing a voting mechanism. Where there is a stalemate or a deadlock, the partnership agreement should also specify a process to resolve the issue. This could include, where a dispute has arisen, bringing in a mediator or an arbitrator. If there is no feasible way to resolve the dispute, the partnership agreement should further provide a process for dissolving the partnership.
3. Hellos and Goodbyes
There are always new people with new ideas who may be a good fit for the partnership. Likewise, existing partners can also lose interest in the business or have other reasons to no longer want to be involved in the partnership. A well drafted partnership agreement sets the framework for addressing how to deal with the rights and interest of existing partners, new partners as well as out-going partners.
This may be a provision that addresses the purchase of a partner’s equity in the business should a partner depart from the business, or a provision for the appointment of a substitute partner in the event of an unfortunate demise of a partner. The latter being an especially important issue for a partnership given that the Partnership Act 1961 prescribes that every partnership is dissolved by the death of any partner in the event there is no contrary agreement between the partners.
4. We Were Never In A Relationship
When partners fight and trust evaporates, it is expected that wherever convenient to do so, one party would say that the parties were never in a partnership! In the absence of a written partnership agreement, the partner insisting that there was a partnership relationship has the burden of proving that the existence of the partnership by adducing credible evidence, testimonies of witnesses and/or available supporting documents such as evidence of payment/receipt of profits. All of this can be avoided if a written partnership agreement was drawn up and signed from the get-go.
In conclusion, having a written partnership agreement is essential for any business as it establishes the framework and basis in which the partnership is formed. Partners can operate with greater confidence and clarity, knowing that the terms they agreed with are enshrined in writing. The partnership agreement essentially facilitates a smoother decision-making process, reduce misunderstandings, and foster a stronger working relationship between partners.
We regularly advise on both the drafting of a partnership agreement and disputes arising between partners (whether or not a partnership agreement exist). Please feel free to reach out to our Alden Yeoh at email@example.com and Benjamin Chia at firstname.lastname@example.org in the event of any queries relating to this article.
This article is contributed by Alden Yeoh of the Corporate & Commercial practice group and Benjamin Chia of the Projects & Real Estate practice group.
For more information, please visit www.kyblegal.com or please feel free to contact Alden Yeoh at email@example.com and/or Benjamin Chia at firstname.lastname@example.org.
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