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What is the effect of an unwritten partnership agreement?

18th June 2012
By Clark_Taylor in Legal
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Simply put, partnership is two or more than two people (groups or companies) who come together to form a business with the intention of making profit.

An oral partnership is usually based on high level of trust. It is generally between family members or friends. It is not a legal requirement that such agreements are written, however partners do prefer to put it on paper.

There may arise some situations that you have not thought about while agreeing orally. Letís examine a few examples;
Adverse effects of an unwritten partnership agreement:

  • An unwritten agreement doesnít provide you with waysthat can help you alleviate some of the potential risks of a partnership, such as if one partner wants to leave, retire, or sell their shares in the company.

  • The documentation on companyís profit, dividends, profit share, partnerís rights, responsibilities and limitations, decision making over severe business issues and steps to follow when a partner leaves business.

  • An unwritten partnership agreement doesnít provideprovisions on collective debts and liabilities in a partnership. What you do when one of your partner quit when business face severe debt? Hence, a written form provides full protection to partners in this matter.

  • An unwritten agreement doesnít set out a precise set of duties, obligations, rights and responsibilities, limitations, decision making and ways to resolve business issues in a fool proof and unanimous way.

What Ireland Law says about Partnership agreement?

The partnership Act 1890 implies on all types of partnership agreements. It imposes particular duties on partners on conduct of business and also about the duties and rules which apply in most cases to any contrary provisions in the partnership agreement of any type. The Act 1890 also defines the provisions in relation to the termination and dissolution of the partnership and the settlement of its liabilities.

In a legal partnership (either between individuals or corporations), each partner is deemed by the Partnership Act 1890 to be the agent of the other partners for the purposes of the business: whatever the partnership agreement says, the acts of a partner in the usual course of the firm's business are those of the firm and its other partners unless that partner is unauthorized and the person with whom he is dealing is aware of the lack of authority. The Partnership act 1890 also states that no partner is entitled to remuneration for acting in the partnership business.Clearly a written agreement is a necessity and should also set out the provisions for the drawings of partners.

Rights of partners according to the 1890 Partnership Act:

  • Every partner may take part in the management of the business. If this in not desired then a written agreement should reflect the wishes of the partners

  • All the partners must exercise their powers for the benefit of the partnership as a whole

  • To change the partnership business there must be unanimity

  • No partner may be introduced without the consent of all the partners

  • A partner may not be expelled by a majority

Main advantages of a well documented Partnership Agreement

Since the law will consider you and your partners all to be equal partners in the business, the situation might become complicated and disputes may arise at the time of sharing profits or losses.

The Partnership Agreement will enable the Partners to specify:

  • How to share profits

  • Amount of capital contributed by each partner

  • Rules that will allow new partner admission

  • How to remove partners from the partnership

  • Roles and responsibilities of each Partner involved in the partnership business

What should be the content of a Partnership Agreement?

  • Partnership shares;

  • Duration of agreement;

  • Capital invested by each partner;

  • Division of profits and losses;

  • Meetings and voting;

  • Holidays and absence;

  • Accounts and records;

  • Restrictions to protect other partners;

  • Expulsion criteria for partners;

  • Comprehensive termination provisions to protect ongoing partners;

  • Other partnership terms;

There is a famous saying that itís better to be safe than sorry. Even though you have high trust level among you and your partners, it is advised that that you get dealings formalized, so that you are all safe when something goes wrong. Net Lawman provides such comprehensive Partnership Agreement that covers almost all such situations.
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