PARTNERSHIP AGREEMENTS – FAILURE TO PLAN, PLAN TO FAIL/ THE COMMERCIAL PRENUP
Starting up a business is an exciting time.
The conversation is focused on the new business opportunities, the pooling of resources or expertise and the anticipated profit.
The unfortunate reality is that many people go into business with family members or friends and because of their close personal relationship they do not anticipate that one day problems may arise and therefore do not have a mutually agreed mechanism for dealing with problems.
So before you go into business, you should consider entering into what is known as a Partnership Agreement to protect yourself and your business.
What happens if there is no Partnership Agreement?
The law assumes that if two or more people come together to carry on a business with a view a common view of profit then they are in a partnership.
When there is no partnership agreement or the partnership agreement isn’t carefully drafted the partnership will be governed by the Partnership Act 1890.
This Act is 125 years old and considered by most in the legal profession as archaic, inadequate and not suited to business in the 21st century.
The inadequacies of the Partnership Act 1980 include;
- There is no right to expel a partner, regardless of how negligent, unprofessional or inappropriate the conduct of the partner is;
- Any partner may dissolve the partnership and if a partner dies the partnership will automatically dissolve;
- There is no power to retire under the Act;
- The Act doesn’t prevent a former partner from competing with the business after he leaves.
What is a Partnership Agreement?
A well drafted partnership agreement can provide for the parties short and long term goals. A partnership agreement should be carefully negotiated between the parties and then tailored to the partner’s particular needs.
A written partnership agreement should contain, among other clauses;
- A non- compete agreement, in the event of a partner leaving the partnership they cannot then set up their own business down the road in competition with the partnership;
- An agreement concerning the financial rights and obligations of the partners including remuneration for partners;
- An agreement concerning partnership property and its ownership,
- Grounds for expulsion of a partner, e.g. negligence or grossly unprofessional behaviour,
- A retirement clause;
The Retirement Clause
For obvious reasons, the retirement clause is generally the most difficult to decide on and is one of the areas if not contained in a partnership agreement can cause the most controversy for the parties and the deterioration of their relationship.
The reality is that as retirement encompasses leaving the partnership for numerous reasons including death that every partner will eventually retire.
A carefully drafted retirement clause will provide a structured plan which protects all parties’ interests in ensuring a balance between the interests of the partners who leave the partnership and those that remain.
If partners negotiate and decide from the outset how issues such as retirement will be dealt with they can prevent uncertainty, acrimony and ultimately professional fees.
Even if they do have a Partnership Agreement you may need to update it. Many partnership agreements that were drafted in the days of the Celtic Tiger are no longer feasible or fair on the parties.
Our Principal, John M. Lynch has vast experience in dealing with Partnership Agreements and can deal with any of your questions.
The material contained in this article is provided for general information purposes only and does not amount to legal or other professional advice. While every care has been taken in the preparation of the information, we advise you to seek specific advice about any legal decision or course of action.