The Importance of Having a Partnership Agreement in Writing

If you are running a business with two or more partners, it is crucial to have a written partnership agreement which spells out a clear understanding of the rules and arrangements applying to your business relationship, even if your partners are your best buddies or family members.

Although it is not compulsory under the Malaysian Partnership Act 1961, it is more desirable to have a partnership agreement in writing to set out the operating guidelines, ensure the smooth operation of your business and avoid disputes and misunderstanding among the partners. You never know what can happen in the future. Minor disagreements may become insurmountable and possibly result in dissolution of your business.

Absence of Partnership Agreements

Partnership is the relation which subsists between persons carrying on business in common with a view of profit. A partnership agreement is a legally binding document that outlines clearly, amongst others, the business management, roles and responsibilities, capital contributions, ownership division, profits and losses, and the business venture.

In the absence of a written agreement in place, the default provisions under the Malaysian Partnership Act 1961 will apply to the operation of a partnership. Particularly, without an express agreement:

a) all partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses, whether of capital or otherwise, sustained by the partnership. This is regardless of how much money each partner contributes to the business, how much time each individual partner dedicates to the business and how much revenue each partner brings in;

b) the partnership must indemnify every partner in respect of payments made and personal liabilities incurred by him:-

• in the ordinary and proper conduct of the business of the partnership; or
• in or about anything necessarily done for the preservation of the business or property of the partnership;

(c) a partner making any actual payment or advance (for the purposes of the partnership) beyond the amount of capital which he has agreed to subscribe, is entitled to interest at the rate of eight (8) per cent per annum from the date of the payment or advance;

(d) a partner is not entitled to interest on the capital subscribed by him before the ascertainment of profits;

(e) every partner may take charge in the management of the partnership business. This may not be a suitable provision if the day-to-day management is to be delegated to a managing partner;

(f) no partner shall be entitled to remuneration for acting in the partnership business;

(g) no person may be introduced as a partner without the consent of all existing partners; and

(h) any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no change may be made in the nature of the partnership business without the consent of all existing partners.

The foregoing default position may not be the best or appropriate for your partnership.

Benefits of a Partnership Agreement

With a properly drawn up partnership agreement, you are able to set out clearly the agreed statement of roles and authorities of each partner, the rights and assets distribution in the event of change of circumstances in the partnership, and a dispute resolution procedure for the partners to recourse to during conflict. You may specify in the partnership agreement the decisions which need the unanimous consent of all the partners, or decisions which need a special majority. Where the partnership uses an asset that belongs to one of the partners, you can make clear in the agreement that such asset is not a partnership property and the terms on which the partnership is permitted to make use of the asset.

A good partnership agreement acts to safeguard the interest of the business and deal with the circumstances when there are changes in the partnership such as in the case of death, bankruptcy, retirement or expulsion of a partner, and dissolution of the partnership. Provisions governing the departure of an existing partner and incoming of a new partner should be included to enable the partnership to carry on continuously without unnecessary disruption to its business.

Should I Get a Legal Professional?

It is not uncommon that there are partnership owners who adopted publicly available online free templates with a one-size-fits-all approach to structure their own partnership agreement. This may be cost saving, but you run the risk of drafting an agreement that contains wrong, confusing, vague or elusive language, and a poorly worded contract is worse than none. 

A partnership agreement drafted by a legal professional will account for every possible scenario that could affect your partnership. They are well-versed in the applicable laws and know what is exactly necessary to include in the agreement based on your specific industry.

About the Author

Tan Lee Weei is a Senior Associate at HHQ specialising in Corporate, M&A and Capital Markets.

Want more insights from HHQ? Subscribe to our email newsletters here.

#Partnership #Agreement #Malaysia #CorporateLaw