But we’re friends – we don’t need a partnership agreement ….

Just because you’re friends doesn’t mean that you won’t run into problems when you open up a business together. The same applies if you go into business with family members – you still need to treat it as a commercial transaction, and put all the necessary devices in place to ensure that the relationship does run into trouble, then you have documentation in place to fall back on.

After building up his business over a number of years, a client decided to let his brother come on board to share the load – as a result, an informal partnership was entered into. They shared profits, they shared expenses, the ownership of the registered business name was transferred over into both of their names … but unfortunately, the relationship broke down.

Despite attempts to reconcile, both brothers agreed that the partnership was no longer. Our client endlessly tried to negotiate with his brother as to how the business (and its assets) would be split up between them, but to no avail. The brother broke away from our client by setting up his own business, and flat out refused to consent to the business name being transferred back to our client, as the original owner of the business. Rather, he operated his business under the same business name.

Unfortunately for our client, he didn’t enter into a formal partnership agreement when his brother joined the business – the agreement would deal with various contingencies such as what would happen if one of them no longer wished to be involved in the business. The only option was to commence Court proceedings to seek appropriate orders from the Court for a formal dissolution of the partnership and an appropriate distribution of assets of the business (which would include the business name).

Whenever you start a new business, you need to set the groundrules with your business partners (and this includes fellow shareholders, if you are operating under a corporate structure). This will inevitably avoid wasting valuable time, energy and money down the track if the relationship sours.

To find out more about starting a business, click here.

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