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Important Note

 

When entering into a business partnership, it's essential to create a Partnership Agreement contract, which defines all the terms and conditions of the relationship.This article should be used as a guide only. The following information is believed to be accurate but only in general terms. Further professional advice should be consulted if you wish to set up a partnership in business.

What is a Partnership? However, it's important to retain a Chinese business & company lawyer to draft the partnership agreement / contract for you when you are doing business in China.

 

In general terns, a partnership is where a business is run by a number of joint owners. These owners (partners) share the responsibility of running the business and therefore any decisions and actions made should be agreed by all partners.

 

Profits are also shared along with any liabilities that are accumulated no matter who was originally responsible for generating the debt.

 

For a business to be considered legally a partnership there has to be at least two owners and no more than twenty (unless it is a limited partnership: see next section).

 

Behind sole-traders, a partnership is the second most popular type of business and is more commonly associated with professional services such as accountants, solicitors and doctors. It is also common in partnerships for each partner to specialise in a specific area of the business. For example, in an accountancy service, one partner may specialise in book keeping, another partner may specialise in financial advice, and so on…

 

You have to be aware that because any decisions and actions are dependent on the other partners agreeing, certain conflicts may arise from time to time. Such conflicts have led to partnerships failing and so it is important that some control can be maintained by compiling a ‘partnership agreement’ prior to starting the business. This agreement will be outlined later in the article.

 

Types of Partnerships

 

There are two main types of partnerships:

 

1. THE FULL PARTNERSHIP, which is the scenario outlined above and is subject to The Partnership Act, 1890. Full partnerships, as outlined above, have between two and twenty partners, but more commonly the number of partners in a full partnership lies between two and four inclusive.

 

2. THE LIMITED PARTNERSHIP, which is subject to The Limited Partnership Act, 1907. Also known as Limited liability partnerships, they are very rare today and account for less than 1% of all partnerships in the UK. A limited partnership is formed when one or more of the partners invest capital into the business but do not participate in running and managing the business. These partners therefore have limited liability as they can only lose the amount of money that they initially invested into the business.

 

In a limited partnership, the law states that there must be at least one partner that has limited liability and at least one partner that has unlimited liability. Consequently, the law further allows this type of partnership to have more than 20 owners.

Advantages of a Partnership

  • The workload can be shared between partners
  • Each partner may specialise in their own area of the business
  • More finance can be raised then, say sole-traders, due to more owners investing in the business
  • Due to the business being generally larger than a sole-trader, it has a better chance at generating other sources of finance e.g. bank loans, etc
  • There are no legal formalities to complete prior to starting the business
  • Partners can cover each other during times of absence, e.g. holidays or illness

Disadvantages of a Partnership

  • Profits are shared between partners
  • Decisions may take time to reach due to other partners disagreeing
  • Partners are equally responsible for liability (stated by The Partnership Act, 1890)
  • Any actions and decisions based on the business are legally binding to ALL partners
  • A partnership is terminated when a partner dies and therefore the process of forming a new partnership has to be taken

Since partnerships require no legal contracts to run a business it is a good idea to prepare a written partnership agreement. This agreement is important because it outlines what is acceptable and not acceptable for the company and if problems arise that can not be solved the written agreement can be used to help solve the problem.

 

Here are some basics that should be included when writing a partnership agreement.

  •  Nature and purpose of the partnership - This ensures that the partners will not deviate from the main purpose of the business.
  •  Capital contributions of each partner - By including how much capital each partner has contributed in writing makes it impossible for others to dispute what others have put into the company. This should not be just limited to money contributions but should include all non-cash contributions as well.
  •  Profit and loss allocation - Most partnerships split the profits and losses equally but this is not always true. This should be put in writing so if discrepancies ever arise there is proof about who gets how much.
  •  Authority of each partner - This should discuss each partner's duties, how the duties will be divided up, and how decisions will be made. Basically it will say who has what authority and how far that authority goes.
  •  How to admit new partners - Most new partners should be added done on a voting basis and everybody should agree. But if you want to have it done by majority rather than unanimous it should be put here in writing.
  •  A course of action if a partner dies - Most partnerships end if one of the partners die, but this does not have to be the case. For example you can choose to let the dead partner's heir or next of kin take over their share of the business or anything else. Whatever process you want to allow needs to be put into writing.
  •  How to buy out a partner's share - This part should have when it will be allowed to buy out a partner's share. For example illegal activities, death, divorce, moving out of state, etc. You will also need to include how the buy out will take place, will the partner get a lump sum, will they be paid over a certain number of months or years, etc.
  •  Signature authority on partnership bank accounts - Here you can allow each partner to sign on behalf of the entire partnership or you can require that every partner must sign the checks.
  •  Conflict resolution - No matter the business or how well planned out things are arguments can arise that can not be solved. Rather than using legal action you can try mediation or binding arbitration, which ever method you prefer should be writing here for legal purposes.
  •  What happens when you need additional capital - Here you should discuss if there is going to be a cap on the amount of capital that partners can contribute. You should also include how your company is going to go about obtaining additional capital such as banks, family, etc.
  •  Can the partners give the company loans - If you are going to allow individual partners to loan money for extra capital you are going to need to determine the terms of repayment and if interest will be paid on the loans, etc.

Just because these are the basics that need to be included in a written partnership agreement does not mean you can not include anything else. You can add whatever you and your partner thinks is relevant to the business and how it should be ran into this agreement.

 

You should include as many contingencies as you can, so that you can refer back to the Partnership Agreement in any situation. It’s easy to create your Partnership Agreement by consulting our China company & business lawyer. 

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