Good business practice recommends that potential partners draw and sign a partnership agreement before commencing trading; If the business is run through a company then the agreement would be a shareholders agreement.
The agreement should set out what happens in the event that the partners experience irreconcilable differences. It can set out the procedural steps to be taken and what happens with the business.
If a partner wanted to retire it could provide that s/he first offers his/her share in the business to the remaining partners at a set price. In many cases, a partner cannot sell to a third person without first offering his/her share in the partnership to the continuing partners on the same terms and at the same price as a Buyer is prepared to pay. Similarly in the event of the death of a partner the Agreement may provide that the spouse offer to sell the share.
It is not necessarily a good suggestion for inclusion in a Partnership Agreement that a bereaved spouse take over as partner. Consider the situation where 3 women operate a cake making business as a partnership. If one died and the Partnership provided for her spouse to take her place as partner, the spouse may not be able to work in the business due to lack of experience. This could create the situation where 2 partners are active in the business but a third partner has no active involvement, other than to a share of the profits.
Difficulties can arise if continuing partners do not have the financial ability to buy out a retiring or deceased partner’s share. Some partnerships put in a place a life assurance policy providing continuing partners with the finance to pay out a deceased partner’s spouse.
A further hurdle to be addressed in any “buy-out” strategy is how to determine the price of the deceased or retiring partner’s share. The Partnership Agreement may provide that an independent valuer determine the price of the share.
If a lease is involved, then any continuing partners would need to indemnify the outgoing partner if the business continues from the same premises. If the partnership operated through a company, then the Landlord would normally have obtained directors guarantees. Again the outgoing partner would need to be indemnified in respect of future liability or fresh arrangements made with the Landlord.
Moneys in the bank, stock in trade, debts of the business, employee holiday pay and long service leave and tax implications upon dissolution of the Partnership are just some of the other considerations in drawing up a Partnership agreement.
Limitations on the power of any one partner to bind the partnership should be set out in any Agreement. It may be that an individual cannot commit the partnership for more than a specified amount or that minimum two partners are required to sign for the partnership. Generally partners are equally liable for debts incurred while they are partners unless an Agreement provides to the contrary.
Generally if a partner operates a competing business then the partner is required to hand over the profits made by that competing business. A Partnership Agreement should specifically impose a restraint of trade on the partners both during the partnership and after it is dissolved.
This is a general overview. For more detailed information contact our office.