Benefits of a Partnership Agreement

In business, it is easy to become enthusiastic about exploring a partnership for your enterprise. Whether it is with a friend, family member or acquaintance whose excitement about a business idea is only matched by your own, you need to remember it is still business. Therefore, you need a partnership agreement.

“Live together like brothers and do business like strangers.” This saying has never been more true than when it comes to a business partnership. To help ensure that this rings true in your endeavour, you can rely on a partnership agreement.

A partnership can be defined as a legal relationship between two or more individuals who enter a contract for the purpose of starting or running a business. In this relationship, the individual members share profits and liabilities.

What Is A Partnership Agreement and Why Should I Have One?

This is a written document whereby all the individuals agree to form or participate in a business venture. The agreement outlines the responsibilities, expectations, investments, and relationships of each member.

It is vital that everyone involved is on the same page. This document facilitates that. Many people make the mistake of relying on blind faith and trust in another person, believing that the other person instinctively agrees about the role of each in the enterprise. Although this might very well be so, a relationship can quickly turn sour when everyone realises they have different perspectives on matters. A partnership agreement protects this relationship.

Disputes or disagreements are resolved in a civil manner by simply referring to the stipulations of the agreement.

Benefits of a Partnership Agreement

Entrepreneurs benefit from a partnership agreement because it outlines the mutually agreed upon responsibilities regarding:

• The ratio of net profit sharing,
• The obligation towards shared net losses and the ratio of the shared loss,
• The proportion in which the assets have co-ownership and how it will be divided upon the dissolution of the partnership,
• Details regarding the dissolution of the partnership,
• Proof that a partnership indeed existed,
• Information regarding the decision-making process of the business.

Further benefits also include the sharing of resources and expertise from multiple people.

Partnerships are also more cost-effective than other business structures because it has fewer legal and administrative expenses.

Elements to Include in Partnership Agreements

For a partnership agreement to thoroughly cover all the important information, you need to include the following four elements.

Contributions of Each Partner to the Partnership

Contributions that the partners make can take various forms. This can be capital, property, services, knowledge, or skill. Partners are not limited to the type of contribution that they make, as long as it has economic or commercial value.

The Objective is to Make a Profit for the Partners

The partnership needs to work towards enabling the business to generate a profit. This profit is then distributed among the partners. Similarly, the way in which the profit is divided is also set out in the agreement. Where partners are not working together to generate profits, it is no longer considered a partnership.

A Partnership Must aim to Benefit the Partners

Regardless of the number of individuals that form a partnership, the partnership business must benefit the common interest of each member. Usually, the intention of this relationship is to generate an income for all parties for an extended period. However, in some cases, partnerships are formed for the sole purpose of completing a specific project or goal.

The Agreement Needs to be Lawful

The term lawful means that something is in accordance with the law and doesn’t impose on the rights of others. In the case of a partnership agreement, the agreement must be valid and lawful. For it to have this status, it must embody the essential benefits of a partnership and must show clear intention of creating a partnership.

Entrepreneurs who are looking to form a partnership or enter one need to consider what exactly it is. From here, they will need to take steps to protect all parties involved by setting up a partnership agreement. A valid partnership agreement will include the intent of setting up the partnership and list all the duties and expectations for each member, as well as insight into profit and liability sharing.

To find out more about the types of companies that you can start in South Africa, read the article about Different Companies to Start in South Africa.