What is a Partnership Agreement?

Oct 4, 2021
5 minute read
Woman supervisor boss teach diverse staff workers explain partnership agreement paperwork at group meeting

As an entrepreneur, doing business alone can make the road seem hard and lonely. Having a second (third or fourth) set of eyes or a person to run things by can make your business easier and more fun. That’s why choosing a partnership business structure could be the choice for you.

However, it’s estimated that 80 per cent of partnerships will fall apart, so it’s important you protect yourself before that happens. That’s where a partnership agreement comes into play. It can help you protect you and your business in the long run, should things not work out.

What is the main purpose of a partnership agreement?

Partnerships can be complex, especially in Canada, where they’re two or more sole proprietors who have banded together. Partnership agreements can help mitigate their complexity by ironing out the details of the business arrangement.

The agreement is a written document between the two or more parties undertaking that business venture together. It outlines the rules, responsibilities, and relationship between the individuals participating in the partnership.

Importance of a partnership agreement

The primary importance of a partnership agreement is to help resolve conflicts before they arise. By clearly outlining the responsibilities and relationship, an agreement can help fend off disputes over details like ownership, roles, and termination of the arrangement. In the long run, this can help save everyone involved money and avoid lengthy court cases by making dispute resolution simpler.

Benefits of a partnership agreement

Business partnership agreements have some serious benefits if you’re planning to go into business with someone else. It helps you establish the business officially, and reduce the potential for issues in the future.

Establishing decision-making process

It’s not uncommon for disagreements to arise in a partnership, so having an agreement right off the bat can help establish who has what say when making a decision. Even if you have a 50/50 partnership where each partner has an equal vote, a partnership can establish the process for a third-party to provide a swaying vote. But partnerships don’t have to be 50/50, it can be established on whatever grounds the partnership agreement lays out.

Reduce money-related disputes

Most partnerships see an equal share of profits and liabilities to each partner, but this division could lead to an issue where one partner has committed more time or money than the others. Your arrangement doesn’t have to adhere to the status quo, your partnership agreement can stipulate a different divide based on specific contributions.

A partnership agreement plays an important role in helping to combat these money-related disputes before they happen by establishing boundaries and rewards based on contribution. Plus, they make sure you get paid. That same agreement can also serve to limit the liability of partners based on their contributions as well.

Avoid legal battles

Lawyers are expensive, especially when something goes to court. While the best partnership plans are drawn up by lawyers, thus requiring a fee, that cost is likely to be significantly less than if you ended up in a court battle over something that could have been outlined with a good partnership agreement.

Not only can it outline the business relationships and awards, a partnership agreement can stipulate cheaper alternative resolutions for disputes, like mediation, negotiation, or arbitration. Saving y