A partnership is formed when two or more people come together to carry out a business venture, with the aim of sharing profits and losses. As such, it is necessary to establish a set of rules and regulations to ensure the smooth running of the business and to minimise conflicts amongst the partners hence the partnership agreement. It is usually advisable that all partnerships regardless of whether the partners are family members or just close friends enter into a partnership agreement.
A partnership agreement provides a guideline on how partners will work together and encourage operative partnership. It identifies individual roles and responsibilities while seeking to create shared values and common purpose setting out key principles for efficient joint working. Though written partnership agreement is not a statutory requirement, it is essential in that it will create an avenue for settling disputes among the partners and thus an important tool to keep away from the automatic application of unsuitable statutory law.
Basically there are three types of partnerships namely general, limited liability and limited partnerships. In general partnership, partners are all responsible for the debts and liabilities of their business. However, for taxation purposes the partners enjoy single taxation as income is reported as individual’s personal income. In limited liability partnership, the partners enjoy protection form the debts and liabilities of their partnership while in limited partnership whereby at least one partner is general and the other is limited, the liability of the limited partner up to the proportion of his/her investment while all the other debts and liabilities are shouldered by the general partner.
Owing to the above reasons it is important to have a partnership agreement as this will give directions on things such as, allocation of profits, ownership interest, dissolution of the partnership, borrowing powers, salaries &remunerations, duties , roles and responsibilities of the partners among others.