Do You Need a Partnership Agreement When Setting Up?
What is a Partnership Agreement?
A Partnership Agreement is a legal document that stipulates the relationships between partners in a Partnership, spelling out how the Partnership will be managed, as well as the rights and obligations of the partners.
Who Can Draft a Partnership Agreement?
As the name implies, only a Partnership, with two or more partners, is able to draft a Partnership Agreement.
Sole-proprietorships, which are run by only a single person, do not have Partnership Agreements. In the case of companies, what would be applicable is a Shareholder Agreement, along with the company constitution.
Is a Partnership Agreement Compulsory?
A Partnership Agreement is not a compulsory document and is not required for the formation of your Partnership.
All Partnerships in Singapore are governed and regulated by the Partnership Act. However, there will still be instances where disputes or issues between partners are circumstantial and are not adequately addressed by the Act.
Hence, it is still highly recommended for Partnerships to adopt a Partnership Agreement to ensure that all discrepancies and issues are carefully ironed out before the Partnership is formed.
Why Do You Need a Partnership Agreement?
Having a Partnership Agreement allows you and your partner(s) to have a more comprehensive understanding of the relationship between partners and what each partner’s rights and obligations are. Supplemented with the Partnership Act, it covers a wider scope to address and resolve potential issues between partners. This allows for a smoother running of the partnership once it is formed.
Even though a Partnership Agreement is not required when you form a Partnership, the best time to draft your Partnership Agreement would be before or upon the formation of your Partnership.
Here’s why you should have your Partnership Agreement before your Partnership is formed, and not after. Do note that these reasons are non-exhaustive and merely highlights the more distinctive benefits to drafting your Partnership Agreement early in the formation process:
1. Allow partners to be clear of their roles before the partnership is formed
With two or more partners in a Partnership, each partner will have different roles and responsibilities. Each partner needs to be clear of his/her role before the Partnership is incorporated, such as whether he/she can buy property for the Partnership, or what management capacity he/she is acting in.
A Partnership Agreement addresses this by clearly defining the responsibilities and performances of each partner – one of the key components in a Partnership Agreement. These include the delegation of authority for partners, and which partner is responsible for the calling of meetings.
When all partners are clear about this before they form the partnership, this allows them to make informed decisions with regard to whether they will proceed with the formation or not.
2. Minimise potential sources of conflict or dispute
In addition, there could be potential conflict and disputes among the partners due to differing management styles or business ideas. For instance, partners may not agree on the procedures for the admission of new partners. One partner may insist on cash capital, while another may insist on sweat capital.
Another source of conflict that could arise would be when the partnership terminates. According to ACRA Regulation, a Partnership is terminated when a partner dies or when the partners agree to do so. However, the valuation of each partner’s stake and contribution in the Partnership is not so clear-cut.
A Partnership Agreement will help to address this, by providing a set of valuation procedures used to measure all partners’ stakes in the Partnership. This is then made known to all partners before the Partnership is formed.
With this done at the beginning of the Partnership, partners will be on the same page from the start and be clear of such procedures. This will help to minimise any potential conflict between partners.
3. Consensus on profit-sharing and remuneration
With two or more partners in a Partnership, this means that profits will be have to be shared and remuneration made to each partner. Partners need to agree on the methods of profit-sharing, as well as the amount and time period of remuneration.
With a Partnership Agreement at the start of the Partnership, all partners are able to come to a consensus on these critical issues before they go ahead and form the Partnership. This helps to negate possible cases of dissatisfaction, such as a partner demanding a larger share of profits that was not originally stated in the Partnership Agreement as the Partnership develops.
Partnership Agreement as Part of the Formation Process
Hence, it is crucial that partners have their Partnership Agreement ready before the formation of the Partnership. This allows for a smooth running of the business, as well as minimising potential disputes and conflicts that could arise in the future.
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