Are business partnerships worth the legal stress?

By Leon Gettler

Business partnerships are like marriages. You start out full of optimism, knowing that combining your skills and strengths will create a formidable team, 'till death do you part'. But partnerships can be fraught with tension, stress and financial problems, and sometimes you discover your goals are far apart. Which raises the question, are business partnerships worth the legal stress?

he stress is manageable, but only if partnership dissolution is anticipated beforehand. A dissolution-of-partnership agreement covers issues such as appointing a dissolution administrator, recording the assets, arranging individual purchases of the assets and disposing of the remaining assets.

Law firms that handle these sorts of issues say that many partnerships are formed using verbal agreements, usually when friends enter into partnerships with each other. However, in these cases the law assumes everything is shared equally, from profits to losses. As a result, when complications arise, it can be difficult for the partners to come to an agreement and maintain their relationship.

This is why lawyers stress that you need a partnership agreement before you even start. As with a marriage, the partnership agreement is essentially like a pre-nup. It defines how success or failure is measured and which laws apply to the agreement. More often than not, a partnership agreement, if well written, is enforceable under civil law.

The agreement should set out concerns like how the business is controlled, how the profits are shared, how the assets (including intellectual property like trade names) are divided and, importantly, who is liable for business debts. Without that, partners may disagree after the event as to their respective entitlements.

A lawyer can draw up a partnership agreement for you. Alternatively, you could draw up one of your own and then take it to a lawyer to check over (it will save you money). The Australian Society of Entrepreneurs has some good guidelines and even provides you with a pro forma partnership agreement template.

Every state has clear laws covering partnerships. In Victoria, there is the Partnership Act of 1958. Sections 36 to 48 cover every way a partnership can end, from death to bankruptcy to just out-and-out disagreement. It also looks at how the profits should be shared after the partnership has wound up.

Partnerships can thrive under the right conditions. How you structure the agreements will determine whether the partnership is worth the legal stress.

What's been your experience with partnerships? Did they cause stress? How did you handle it?

*This article contains general information and commentary only, and is not legal or financial advice, and you agree not to rely upon this article in any way.


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