Write a partnership agreement

Partnerships are effectively a collection of two or more sole traders and as such, share the responsibility for a business. When you’re in a partnership, it is highly advisable to have a formal, written partnership agreement. This will give you a framework for defining each partner’s obligations, and settling the conflicts, disagreements and other thorny issues that naturally occur in business relationships. Ultimately, it will help ensure the long-term well-being of your business.

In the absence of a written agreement, the general partnership rules come into effect. These state that all the partners are equal and share profits, losses, start-up and running costs as well as the workload equally. Even without a formal partnership in existence, if you behave as though you are in a partnership, people with whom you do business will be entitled in law to treat you as one. For example, if one "partner" takes on a commitment and fails to deliver on it, you will be equally liable to remedy the situation.

Key areas to cover in your partnership agreement:

• What are each partner’s responsibilities within the business, and what level of performance is expected?
• Are partners expected to make a full-time commitment to the venture, or are other business activities permitted?
• What will be the income of each partner, and how will profits or losses be distributed?
• What will each partner be contributing to the partnership in terms of cash, assets, loans, and investments?
• What guidelines should be followed if one partner wants to leave the partnership?
• Will partners be allowed to sell their interests in the business to outsiders and, if so, how will their share be valued?
• On what grounds can a partner be expelled from the partnership (misconduct, non-performance of duties)?
• How will new partners be admitted to the partnership?
• What methods will be used to settle disputes that cannot be otherwise resolved?

Keeping costs down

You can save money by drafting your own version of the key parts of your agreement, then taking it to a lawyer to be reviewed, clarified, modified and finalised. It is important to have a lawyer review the contract because you want to make sure it complies with the partnership laws. Finally, each partner might want to have his or her own lawyer look it over, since your lawyer cannot represent the interests of each individual partner.

Action Checklist

• Decide if a partnership is right for you
• Agree the basic responsibilities of each partner
• Make a first draft of the partnership agreement and agree it with your prospective partners
• Talk it over informally with your lawyer - ideally before any charges are levied