Business partnerships are just like marriages in many different ways.
Partners enter into a partnership bright eyed and bushy tailed, full of hope and optimism for the future. Unfortunately, just like a marriage, partnerships can sometimes end in a bitter and acrimonious mess.
It is imperative that before entering into a partnership, prospective partners sit down together and set out exactly what they want from the partnership. A partnership agreement is vital to ensure important issues are clearly articulated, including management of the partnership, retirement provisions, the handling of partnership disputes and how the dreaded dissolution and winding up of the partnership is dealt with at the bitter end.
In particular, a well drafted partnership agreement should make sure that dealing with disputes between partners is clearly set out. When disputes arise, or partners ‘go rogue’, the options open in the event there is no partnership agreement, are limited. Without an agreement, the unsatisfactory default provisions of the Partnership Act 1890 come into play. The default provisions allow for any partner to serve a notice to terminate the partnership. In addition, very problematically in practice, no majority of partners can expel a fellow partner and the options open to the remaining partners are stark and few.
Without a partnership agreement, the reality of the situation is that the only solution to get rid of the unruly one may be to enter into a general dissolution. This will cause considerable upheaval and could eventually result in the death-knell of the business. Following dissolution, the assets and liabilities of the partnership must be dealt with and essentially the partnership is ‘wound up.’ Without agreement between the parties as to how dissolution is to occur, the courts may have to become involved and lengthy litigation may be the only outcome, resulting in blood, sweat and tears.
The situation is not all bleak. In the same way savvy couples enter into pre-nuptial agreements, savvy partners can ensure that with careful planning and management, the words of Dolly Parton’s ‘D.I.V.O.R.C.E’ will not be echoing in their ears.