Business Attorneys
The importance of drawing up a partnership agreement
Before starting an activity
Are you about to establish a partnership? Do not start your business before you have entered into a partnership agreement.
Reality shows that starting an activity before making an agreement, leads to disputes between the partners, inefficiency, and, sometimes, even to an early dissolution.
By Igal Mor, Adv. & Notary
Accuracy in Legal Advice. Excellence in legal support.
Briefly: What is a partnership?
It is a form of legal incorporation, which aims to unite several people or companies, with the aim of establishing a joint business that will generate economic profit. The costs of establishing a partnership are low in relation to the costs involved in establishing a company Ltd. and the laws that apply to it are less strict and formal (for example, there is no obligation within the framework of a partnership to write bylaws). Therefore, it is a very common form of association in Israel, despite the fact that the partners are personally and unlimitedly indebted to it, jointly and severally. Once a decision is made to form a partnership, one of the first steps to take is to make a partnership agreement. More than once, the lack of formality that characterizes some partnerships causes the parties to reduce its importance and they start setting up and running the business before signing an agreement. This situation is not recommended as it can greatly hurt the partnership, how? We will explain below.
Why is it important to make an agreement?
A partnership agreement acts as a basis for business engagement, in which the partners will determine the rights and obligations of each partner, the method of work, the areas of responsibility of each of them, etc. Therefore, if the partners start their business without having entered into and signed a partnership agreement, it is similar to building a building without having foundations. Before setting out, the partners must be sure that there is an agreement between them on its essential components. Without doing so, disputes will soon arise between the partners and these will not allow for efficient business conduct and will lead to economic losses and even an explosion which could lead to the dissolution of the partnership. One of the reasons why many partnerships start operating without a partnership agreement is the nature of the relationship between the partners. Often these are family members, friends or acquaintances who decide to join together to start a joint business and due to their personal acquaintance they reduce the importance of the agreement and believe that they know each other’s opinions.
What does a partnership agreement include?
A partnership agreement must address all aspects and the more detailed it is, the more efficient the partnership will be and maximize its profits. Additionally, the more issues agreed upon and clarified in advance, the smaller the opening for disputes becomes among the partners, allowing partnerships to be conducted in an efficient manner. It is necessary to first determine what the purpose of the partnership is, what type of business you want to establish, and what its scope is. The partners must decide what the working methods are, the work procedures they want to lead, what the authorization relationship is between the partners, and how decisions are made. A partnership agreement must determine how the profits are distributed among the partners (which is not always equal) as well as how the losses are handled. Another very important aspect is the establishment of a dispute resolution mechanism so that if a dispute arises between the partners, they will be able to resolve it as soon as possible. It is also worthwhile to address in a partnership agreement a situation of liquidation and determine the distribution of profits in this situation.
In conclusion
The correct date for signing a partnership agreement is at the beginning of the partnership before the members begin operating as partners. The reason for this is to see if there is an understanding and agreement between the partners about the nature of the partnership and how it is managed/functions. This is before they spend time and money on a partnership that may not take off. More than once, when the parties sit in our offices for the purpose of establishing the partnership and drafting the agreement, they discover that they do not see eye to eye with regard to most material matters. When this is the case, we talk about all the possibilities and examine whether there are auxiliary mechanisms that can bring the partners together and produce an agreement, otherwise there is no point in entering into a partnership in the first place. In this hypothetical scenario, the right thing would be for the partners to go their separate ways. On the other hand, when there is agreement and understanding between the partners regarding the important principles and issues, more often than not they will be able to make a good and comprehensive partnership agreement. This is because, in this hypothetical scenario, the partners know that there is a solid foundation for establishing a successful and prosperous business.
It is our pleasure to offer you legal advice so you can examine all the options available to you for incorporation and the creation of a partnership agreement.
Adv. Mor & Co.’s commercial law department has experience in representing various entrepreneurs, businesses, and corporations from Israel and abroad in a wide variety of legal areas.
